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September 30, 2014

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If Congress doesn’t act, distressed homeowners could take another hit

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Nevada continues to be plagued by high foreclosure rates.

Take note, Southern Nevadans: If you own one of the estimated 100,000 homes that experts predict will be lost to foreclosure before the protracted housing crisis comes to an end, you may see a massive tax hike this time next year.

A law that has waived homeowners’ tax liability for any mortgage debt that was forgiven through modified loans, short sales or foreclosures is expiring at the end of 2012. If Congress doesn’t vote for an extension this year, forgiven debt will again be taxed as regular income — just as it was before 2007, when the provision was passed after the housing bubble burst.

In the past four years, the law has waived the tax liability for tens of billions of dollars in forgiven mortgage debt, saving families who are either severely underwater on their mortgages or have lost their homes tens or even hundreds of thousands of dollars in taxes they would have otherwise owed the federal government.

To the congressional delegation from Nevada, the hardest hit and most foreclosure-ridden state in the nation, extending the provision seems a no-brainer, at least in concept.

But even though the expiration date is months away, some lawmakers are bracing for an uphill battle.

•••

The main fight in Congress this year is over how to balance the federal budget, or at least reduce deficit spending. The constant partisan back-and-forth over how best to do that essentially boils down to two options: cut more or tax more.

But also in the mix is a third option: getting rid of tax loopholes.

To the Democrats, that means eliminating subsidies for the oil and gas industries and eliminating tax write-offs for luxury items. To some Republicans, waiving taxes for forgiven debt for foreclosed homeowners looks like a tax giveaway, experts say.

“There are many on both sides of the aisle who believe ... the way to (bring the debt down) is to get rid of special-interest earmarks in the tax code. And for some, this is how this will be presented,” said Douglas Holtz-Eakin, former director of the Congressional Budget Office, who now heads up the conservative-leaning American Action Forum.

He said last week that he expects Republican House freshmen affiliated with the Tea Party to sound the loudest alarm on “tax-code ‘bailouts’.”

(For proponents of extending the tax waiver on forgiven debt, it probably doesn’t help that the provision, initially adopted in 2007, was extended through 2012 as part of the same bill that orchestrated the bank bailout.)

“Past this year, if you start doing tax reform, that reform is about getting rid of all sorts of special provisions,” he said.

Not all Republicans see the tax waiver as an extension of free money to troubled homeowners. Nevada’s Republican lawmakers expressed support for extending the program.

A spokesman for Rep. Joe Heck said he is in favor of an extension.

Staffers for Rep. Mark Amodei called the tax waiver “a good program” that should be extended as long as lawmakers could find money elsewhere in the budget to offset the $2.7 billion the federal government won’t be collecting over a two-year extension of the program.

Sen. Dean Heller said Monday that he couldn’t see how it made sense “to tax income people have never seen,” as would be the case if the program were allowed to expire.

But the opinions of Nevada’s Republicans may not matter as much as the opinion of one Republican from Ohio: House Speaker John Boehner.

In 2007, when lawmakers last went on record about this program, Boehner was one of just 27 lawmakers — all Republicans — who voted against the Mortgage Forgiveness Debt Relief Act, as it was named. (Heller, Rep. Shelley Berkley, and Sen. Harry Reid, the only current members of the Nevada delegation who were representatives in 2007, all supported it.)

Boehner’s district in Ohio hasn’t been as hard-hit as Southern Nevada. But Boehner was joined in that “nay” vote by four House members representing four of the top 10 congressional districts hardest hit by foreclosures at the peak of the crisis.

The House speaker hasn’t made any moves to extend the tax waiver. But some Democrats, led by House Ways and Means Committee members Jim McDermott of Washington and John Larson of Connecticut, are circulating a bill called the Tax Relief for Veterans and Homeowners Act.

The bill was presented to lawmakers in a letter that began circulating in Congress on Feb. 10, one day after the federal government and 49 state attorneys general struck a $25 billion settlement deal with the country’s five biggest mortgage banks.

"Unfortunately, our existing tax law would treat much of this relief as income that homeowners would have to pay tax on,” McDermott and Larson’s letter reads.

Their bill extends the Mortgage Forgiveness Debt Relief Act provisions for all principal reductions for three years and gives special consideration to veterans who were wrongfully foreclosed on.

Berkley, who is on the Ways and Means Committee and co-chairwoman of a special Democrats’ task force on housing, is expected to co-sponsor the legislation.

While a potential legislative vehicle hasn’t yet emerged in the Senate, Reid is expected to push for an extension, possibly as part of the lame-duck tax bill many are anticipating will dominate the postelection agenda of 2012.

But it could come sooner: President Barack Obama called for an extension of mortgage forgiveness tax relief in his fiscal 2013 budget — and fiscal 2013 starts Oct. 1 this year.

•••

The big question, however, is what might happen in the interim, as homeowners sitting on distressed properties watch Congress and wonder whether lawmakers will be able to pass an extension before it’s too late.

“Even the uncertainty related to passage of the bill can quickly hold back economic recovery,” said Lawrence Yun, chief economist for the National Association of Realtors, which strongly backs an extension of the tax relief for forgiven mortgage debt.

“If people have to plan to pay taxes on debt forgiveness, then they will quickly retrench to say they cannot go out and spend, because they need to save money for this unknown tax amount that may be out there,” Yun continued. “In terms of the economic impact, disproportionally, places like Nevada and Florida will be much more affected.”

The taxes that would be levied on forgiven debt, counted as extra income, are a one-shot deal: Just as taxes are applied to income in the year that it is earned, forgiven debt would only be taxed in the year it was received through a principal reduction, foreclosure or short sale.

A worst-case scenario could also be a modest run on the housing market in the next 10 months as owners of distressed properties try to dump them before the end of the year.

“If, say, there’s an added rush to bring properties onto the market(for example, speeding along a short sale), added supply always means lower prices, so the lower prices would hamper this housing recovery,” Yun added. “Honestly it depends on whether or not there are buyers able to absorb all of this supply coming onto the market.”

A more likely impact from the uncertainty could be the Obama administration’s push for mortgage modification.

While underwater homeowners have been begging for banks to reduce the principal on their loans, homeowners may instead opt for less-aggressive mortgage modifications that won’t leave them with a tax burden in the year ahead.

Mortgage Forgiveness Debt Relief can be applied to up to $2 million in forgiven debt that would otherwise be taxed (about $700,000 in taxes, at the applicable 35 percent rate of taxation). Most distressed homeowners’ mortgages are not that big, but without an extension of the tax break the impact can still be dramatic.

“People want to get mortgages modified, but (without the tax break) it suddenly changes the incentives for a homeowner,” Yun said.

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  1. My money is on if it is up to congress to act homeowners WILL be taking another hit.

  2. Ipsuid stated, "The rules for HARP refinance changed on Feb. 6th. The banks aren't heavily advertising this yet, because they are just getting their systems adjusted to handle it.

    Basically if your loan is backed by Fannie or Freddie and you can meet basic underwriting requirements (e.g. you have a means to pay a mortgage, and the house is standing) then the bank can refinance your mortgage. The bank will NOT do an appraisal... its just assumed the house is worth what it was when it was purchased."

    Added to this, Dudesickle remarked that, "If people are walking away from mortgages, there is a good chance they are insolvent as described by the IRS. Filing a Form 982 may limit or eliminate the tax burden of the debt forgiveness."

    Both Commenters offered some reprive that this article did not cover. There are thousands of underwater homeowners who really need some assistance with keeping their homes, and it seems that only the BIG BANKS and WALL STREET gamblers are the only ones receiving any attention. Come on Lawmakers, help out the little guy citizen too!

    Blessings and Peace,
    Star

  3. I'm torn. I don't think the majority of people should have to be taxed on income they've never seen. However, this would also prevent the vast majority of strategic defaults (those that can afford to pay but choose not to).

  4. "Take note, Southern Nevadans..."

    Demirjian -- I'd like to think that's your tongue-in-cheek play on words.

    "There are thousands of underwater homeowners who really need some assistance with keeping their homes, and it seems that only the BIG BANKS and WALL STREET gamblers are the only ones receiving any attention. Come on Lawmakers, help out the little guy citizen too!"

    star -- that's herdspeak. Nevada lawmakers first covered this in 1907's Negotiable Instruments Law. The debt is created by the Note, a negotiable instrument ruled by centuries-old laws. Today you'll find it in NRS 104 Article 3, which is self-help for all bona fide parties to those Notes. Homeowners are those notes' makers. Our Supreme Court confirmed this last July in the Pasillas and Leyva cases. It's time to stop crying for solutions when all they have to do is look it up then use it.

    "I don't think the majority of people should have to be taxed on income they've never seen."

    JerryWayne -- really? Tell that to our thousands of service workers taxed on the tips they don't get.

    "The note is the cow and the mortgage the tail. The cow can survive without the tail, but the tail cannot survive without the cow." -- the late Professor Chester Smith of the University of Arizona College of Law, as cited in Restatement (Third) of Property, Mortgages 5.4, Reporters' Notes

  5. Until the government makes the banks reset mortgages to the current value of the property, this problem will continue for 10-20 years.

  6. "Until the government makes the banks reset mortgages to the current value of the property, this problem will continue for 10-20 years."

    PGelsman -- which the federal government is Constitutionally forbidden to do by the Contract Impaiment Clause. That said, the evil entities gobbling up our homes are those We the people have bailed out -- Fannie Mae being the leading culprit.

    "Other like Paul want the banks to take the hit. I guess he doesn't value the honor of a contract."

    acejoker -- you're not paying attention. Contract law doesn't rule these transactions, the law of notes does. These instruments are in the same class as checks and money orders. Otherwise why are the homeowners the only ones who sign them? Some contract principles are incorporated into them, not all contract law.

    Until our federal government gets over protecting their status quo, which includes wasting billions for duplicated programs, nothing will change. Check it out @ http://tucsoncitizen.com/usa-today-news/...

    "Why don't the banks want us to see the paperwork on all these mortgages? Because the documents represent a death sentence for them..... in America, it's far more shameful to owe money than it is to steal it." -- an article from the November 25, 2010 issue of Rolling Stone by Matt Taibbi "Courts Helping Banks Screw Over Homeowners"

  7. "Only a corrupted liberal could believe that foolish statement. . . . Now we are trying to figure out ways for borrowers to avoid their obligations to lenders."

    acejoker -- despite explanations and pointing you to the actual law defining those "obligations," you remain profoundly ignorant. Your choice.

    "The regulators got bailed out, the middle class lose their jobs and their houses. All this desire to trust in the government to make sure that big corporations won't hurt them actually is a backfire on them." -- Rep. Ron Paul to Jon Stewart 9/26/11, citing the example of the real estate crash as example of government regulation gone bad

  8. This is a dilemma and of course another tax break for a certain few, not available to those who have saved and paid their way.. It is much better the banks do not forgive the debt and the homeowner has a lien on his life to pay it back. After all, this is the right thing to do, pay back your debt. So tax the forgiveness, though I would have thought much could be offset by the capital loss taken, should expire along with the current president ASAP..