Forgiven Debt Would Be Tax-Free
By Marcy Gordon
Associated Press
Friday, October 5, 2007
Financial relief for homeowners facing foreclosure or in bankruptcy advanced yesterday as the House approved legislation to help financially strapped homeowners.
The bill, passed on a 386-to-27 vote, would give a tax break to homeowners who have mortgage debt forgiven as part of a foreclosure or a reworking of a loan. The value of that forgiveness, which is now taxable as income, would become tax-exempt.
While the measure is anticipated to reduce the taxes of some strapped homeowners by $650 million, it also looks to help offset that by limiting a tax break available on the sale of second homes.
Another measure, narrowly approved by a House Judiciary subcommittee and opposed by Republicans on the panel, has been sent to the full Judiciary Committee. It would revise the bankruptcy code to help homeowners facing default and foreclosure, biting into already hard-hit profits at mortgage lenders.
That bill would allow judges to order mortgage lenders to ease terms for homeowners in bankruptcy proceedings. Currently, mortgage lenders can foreclose against a homeowner in default 90 days after the filing of bankruptcy.
Legislation similar to both bills is pending in the Senate.
Mortgage lenders would be "terrified" of getting wrapped up in bankruptcy proceedings, said Brian Gardner, an analyst with the New York-based investment firm Keefe, Bruyette & Woods.
The House vote was the latest congressional reaction to a mortgage crisis touched off this spring by a blowup in high-priced home loans for risky borrowers, which has thrown a pall over the economy. An estimated 2 million to 2.5 million adjustable-rate mortgages -- worth some $600 billion -- will jump from low initial "teaser" rates to higher rates this year and next.
Foreclosures are at record highs, and late payments are spiking. Lenders have been forced out of business and investors have taken huge financial hits.
"Families dealing with the pain of a foreclosure should not have the double whammy of a large tax bill," Rep. Charles B. Rangel (D-N.Y.), chairman of the House Ways and Means Committee, said of the tax-relief measure he sponsored, H.R. 3648.
The legislation also makes it harder to get breaks on capital gains taxes for the sale of second homes.
The White House supports the tax measure but wants the mortgage relief to be in effect for three years, not permanently, as approved in the House. President Bush is opposed to limiting tax breaks on the sale of second homes.
The Mortgage Bankers Association expressed strong support for the tax-relief bill but fiercely criticized the bankruptcy measure, which is H.R. 3609.
"Lenders will have no choice but to move to foreclosure right away to ensure that they are not covered by the onerous provisions of this bill," the group said in a statement. "In the longer term, investors and speculators who overpaid for homes at the height of the housing bubble will have an incentive to file for bankruptcy, walk away from the loan and property, and reap an undeserved windfall."
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