Congress considers extension to mortgage-debt relief deadline
Action not expected until post-election
By Ken Harney Inman News®
For anyone hoping that a fractious, election-bound Congress can manage to extend a law that is crucial to the housing recovery -- the Mortgage Forgiveness Debt Relief Act -- here's a little good news: Before heading home for the Easter holiday recess, key members of the House and Senate tax-writing committees introduced bills that would keep the law alive through 2014.
Without action by Congress, the law -- which allows homeowners whose mortgage debts have been written off by lenders in short sales, foreclosures, principal reductions and deeds-in-lieu of foreclosure to escape heavy federal taxation on the amounts forgiven -- would expire Dec. 31, 2012.
Real estate and mortgage trade groups believe that any expiration would be disastrous for large numbers of underwater owners trying to rid themselves of smothering debt loads.
It could also sharply reduce the appeal of short sales and other resolutions needed to clear out distressed inventories.
If homeowners thought they'd be penalized for agreeing to principal reductions and debt cancellations, they'd be far less likely to participate.
That, in turn, could hamper efforts like the $25 billion nationwide robo-signing mortgage settlement, which features more than $10 billion in debt forgiveness, as well as the Obama administration's efforts to spur short sales and principal reductions at Fannie Mae and Freddie Mac.
Until the tax code was amended in 2007, the Internal Revenue Service treated owners whose unpaid principal balances were canceled as having received actual income from the transaction and hit them with tax bills.
For example, in a short sale where the lender wrote off $100,000 of unpaid mortgage debt prior to 2007, the federal tax code treated the $100,000 as ordinary income to the seller and the IRS imposed tax levies at regular rates.
Though the prospects for quick action on the issue are virtually nonexistent, the sudden introduction of multiple bills on both sides of Capitol Hill can only be a positive sign.
In the Senate, Finance committee member Debbie Stabenow (D-Mich.) joined with fellow Democrats Robert Menendez (New Jersey), Sherrod Brown (Ohio) and Jeff Merkley (Oregon); and two Republicans: Dean Heller (Nevada) and Johnny Isakson (Georgia), on a proposed extension (S 2250) through Dec. 31, 2014.
In the House, 14 of the 15 Democrats on the Ways and Means Committee -- the point of origination for most tax legislation in Congress -- are co-sponsoring a bill (HR 4202) with the same provisions as Stabenow's.
One Republican on the Ways and Means Committee, U.S. Rep. Tom Reed of New York, also is introducing an extension bill, but the text and bill number were not immediately available.
President Obama's fiscal 2013 federal budget proposal calls for an extension through 2014, which congressional analysts estimate would cost the government $2.7 billion in tax revenues over the coming two years.
In a statement, Stabenow said, "It is bad enough that so many families are faced with mortgages that now exceed the value of their home.
"But to add insult to injury, without this bill the IRS would once again require these families to pay hundreds or thousands of dollars in additional income tax when they sell or refinance their home. That's just wrong."
The lack of more Republican co-sponsors on Reed's bill may point to difficulties for the debt relief extension that could materialize as early as the end of this month.
The Republican-controlled Ways and Means Committee says it plans to look at all "extenders" -- expired or soon-to-lapse special benefit programs ranging from corporate research and development tax credits to individual homeowner write-offs for residential energy improvements -- within the next two weeks.
If the Republican majority decides that mortgage debt relief is just another contributor to the federal deficit, the House version of bills could be derailed indefinitely.
(Remember that last December, House and Senate conferees deferred action on a long list of extenders -- including deductions for private mortgage insurance premiums -- and they all remain in legislative limbo.)
But tax analysts and lobbyists on Capitol Hill say the most likely scenario shapes up something like this: Though the National Association of REALTORS® and other groups will push for early consideration of the debt relief extender, it's unlikely that Congress will be able to focus on a major revenue package until after the November elections.
Then, the victors and lame ducks from both houses will have to do the year's tough lifting: They'll take up the entire range of budget, deficit and debt-ceiling issues during several frenetic weeks, and finally hammer out an omnibus bill that includes either a one- or two-year new lifeline for mortgage debt relief.
Though there's a chance the entire process will break down again as it did last year, Jim Tobin, chief lobbyist for the National Association of Home Builders, told me last week, "We remain optimistic that once we get past the election and into a robust lame duck session, Congress will do the right thing" on mortgage forgiveness.
"But any way you look at it," he added, "taxing (financially distressed) homeowners on phantom income is just inequitable."
Plus, it makes absolutely no economic or political sense for either party -- whether we have a President Romney and Republican majorities in both houses, or President Obama and the Democrats come away big winners -- to kick homeowners when they're already down.
Stay tuned to ShortSaleSully for more great information ... and as always
Keep the faith!