Extending the Mortgage Debt Relief Act Far From Certain

 

Last month I reported on the looming expiration of the Bush tax cuts at the end of this year.  Included in these expiring cuts is the Mortgage Debt Relief act.  This provision, passed into law in 2007, allows an exemption from taxes for people who have lost their home through foreclosure or short sale and have received forgiveness from the banks for the portion of their debt that was not covered by the foreclosure auction or short sale.  If the tax cuts are allowed to expire without modification or extension, then the Mortgage Debt Relief act would also expire.  This expiration would mean that any homeowner receiving forgiveness for a portion of the amount owed on their mortgage, whether through short sale, foreclosure, loan modification would be required to pay taxes to the Federal Government on this amount as if it were regular income.

Although there is widespread bi-partisan support in both houses for an extension of the Mortgage Debt Relief act, it is still not certain that this act will, in fact, be extended.  The reason for this can be found in the figures behind the law.  Although we do not have data available to show exactly how much total debt homeowners have been forgiven in the last five years, we do know that the Congressional Budget Office has estimated that allowing the exclusion to expire would generate around $1.3 billion in taxes from affected homeowners.  According to Brian Bernardoni, senior director of government and public policy at the Chicago Association of Realtors, this juxtaposition between what is best for homeowners and what is best for a government struggling to combat a huge deficit is what keeps the extension of the Mortgage Debt Relief act in doubt.  Bernardoni notes, “This could be one of the unintended consequences of a deal to avoid the fiscal cliff.  Singling out any one group for tax relief is going to be difficult.”

There is a bit of the chicken and the egg paradigm at work here.  Some lawmakers believe that the health of the overall economy must be considered over the interests of a particular group of citizens or a particular sector of the economy.  Others believe that the health of the housing market is so directly tied to the recovery of the economy at large that failure to extend this measure could prove debilitating to the entire recovery effort.  Mesirow Financial’s Diane Swonk puts it this way, “Housing is finally showing signs of healing after a prolonged illness...We still have a long way to go, but it has reached a critical shift in momentum, if allowed to continue; the choice is in the hands of our elected officials, and the clock is ticking.”

I will continue to update my readers on the status of all negotiations in Congress, and their potential impact on the housing markets, as those details become available.