Washington Gridlock Holding Up Tax Law That Helps Housing Mkt

01:36 EST / Feb 20

By Ian McKendry

WASHINGTON (MNI) – Gridlock in Washington is holding up an extension of a tax law that could benefit more than a million distressed homeowners and is almost universally regarded as a measure that should be extended.

The prospect of full tax reform in 2014 is beginning to look less likely, but a tax extenders package could still get passed. One of the tax bills that is likely to be included in an extenders package is the Mortgage Forgiveness Debt Relief Act – which benefits homeowners that are offered principal reducing mortgage modifications. The law expired in 2013 but if passed, it is likely to be done retroactively. However, the clock is ticking and uncertainty is growing.

“It is caught up in the whole discussion about the extenders that expired,” National Association of Realtors Deputy Chief Lobbyist Jamie Gregory told MNI. “There is a spotlight on it, people know it needs to happen,” Gregory said, but added “people are starting to get nervous.”

“The calls are starting to pick up – so that means its weighing more on more peoples decision making,” Gregory said.

Under federal tax law, if a lender cancels or forgives a debt, the cancelled or forgiven amount becomes taxable income for the borrower. The Mortgage Forgiveness Debt Relief Act of 2007 made a provision that allowed forgiven mortgage debt to be excluded from being taxed as income to encourage mortgage modifications.

Laurie Goodman, director of housing finance policy at the Urban Institute told MNI that the Act plays a key role in principal reduction modifications that are offered to seriously delinquent borrowers, who may choose to “wait it out” and eventually be foreclosed on rather than pay tax on the reduced principal. However, the modification becomes much more attractive to the borrower when the reduction comes without the hefty tax bill.

In a research note, Goodman and co-author Ellen Seidman, a senior fellow at the Urban Institute, estimate that as many 1.4 million seriously delinquent borrowers could benefit from a principal reduction mortgage modification and as many as 2 million borrowers could be affected by the growing uncertainty.

Goodman conducted the analysis before joining the Urban Institute, when she was senior managing director at Amherst Securities. She testified on Capitol Hill in 2012 that the Federal Housing Finance Agency should allow Fannie Mae and Freddie Mac to conduct principal reduction modifications because of its effectiveness.

Edward Demarco, then FHFA Acting Director, opposed principal reduction modifications because of the moral hazard they presented – even though an FHFA analysis indicated that allowing Fannie Mae and Freddie Mac to conduct principal reduction modifications could be beneficial.

In the research note, Goodman and Seidman say “FHFA’s new director, Mel Watt, is likely to revisit this issue,” but that “the expiration of the Mortgage Debt Relief Act pushes priority of the principal forgiveness issue further down the FHFA queue, and when Watt revisits the issue, approval will be less likely.”

The note also warned that not extending the Act contradicts some of the settlements between government regulators, lenders and servicers. The National Mortgage Settlement in 2012 between State Attorneys General, the Department of Justice and the five largest mortgage lenders set aside $10 billion of the $25 billion settlement for principal forgiveness. The $13 billion settlement JPMorgan reached with regulators in 2013 set aside $4 billion for “consumer relief” which includes principal reduction modifications.

“The timing of the expiration of the Mortgage Forgiveness Debt Relief Act is thus particularly unfortunate because it undermines the effectiveness of an increasingly utilized tool to reduce foreclosures,” Goodman and Seidman said.

NAR’s Gregory said his organization remains optimistic that the law will get extended before the end of the tax year, “but we don’t have certainties.” He added that movement on the Senate side seems likely while “the water is a little murkier on the House side.”