Why We Should Extend The Mortgage Forgiveness Debt Relief Act

Passed in 2007, the Mortgage Forgiveness Debt Relief Act allows the homeowners to avoid taxes on forgiven mortgage debt.  For example, if a homeowner sold their $240,000 home for $40,000 in a short sale, they’re not obligated to pay taxes on the $200,000 of forgiven mortgage debt.  However, the Mortgage Forgiveness Debt Relief Act is scheduled to expire at the end of 2012 and there is a fear that it won’t be extended.  If that happens, homeowners who are part of the mortgage settlement reached last month could find themselves facing heavy tax debt obligations.

What’s at stake?  Well, let’s first take a look at the big picture. The number of American homes underwater (worth less than their mortgage) is at 22.8 percent. That’s almost one in four homes underwater.  And the difference between the value of their home and the mortgage isn’t insignificant.

The average NorthPoint Mortgage balance for the first lien borrowers was $219,000, with an underwater average of $51,000, and a loan-to-value ratio of 130 percent. Those who were upside down with first and second liens had an average mortgage balance of $306,000, were upside down by about $84,000, and had an LTV of 138 percent.

Even if only a fraction of those homeowners participate in the mortgage settlement, we could see a significant number of households taking on heavy tax debt in 2013 if the tax relief act isn’t extended.  This is tax debt which will be nearly impossible to pay off or discharge in bankruptcy.  If this tax relief act expires, some homeowners might be better positioned if they simply allow their home to go into foreclosure since deficiency balances are dischargeable in bankruptcy while tax debt discharges face more difficulty.  Failure to extend the Mortgage Forgiveness Debt Relief Act could discourage homeowners from trying to sell their underwater homes and send an even larger number of homes into foreclosure here in Washington State.

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By:  Anton Stetner Google