While Congress was on its holiday recess in December, an important piece of legislation for distressed homeowners was allowed to expire, putting the recovery of many homeowners in jeopardy.
The Mortgage Forgiveness Debt Relief Act of 2007 is a key part of the loan modification programs enacted during the recession. The IRS considers forgiven or cancelled debt to be a form of income, and therefore taxable. This bill exempted homeowners who had debt forgiven through a loan modification from paying those extra taxes, since the whole point of the modifications are to lighten the load on distressed borrowers.
On December 19, 41 State Attorneys General sent a letter to Congressional leadership urging them to renew the law. The letter points out that, although the economy and the housing market have been slowly recovering, 14.5 percent of homeowners with mortgages—7.1 million homes—still owe more than their house is worth.
Although the economy is firmly on the path to recovery, recovering does not mean recovered. Many homeowners are at the same place they were when all of this started, and ending the tax exemption for those homeowners will effectively end or undermine the loan modifications that are keeping them afloat.
I wrote to Senators Durbin and Kirk and on January 16, 2014, Senator Durbin responded, advising me that “The Mortgage Forgiveness Tax Relief Act of 2013 (S. 1187) [which] extends the Mortgage Forgiveness Debt Relief Act through 2015. S. 1187 has been referred to the Senate Finance Committee.” In the December 26, 2013 issue of Mortgage News at MortgageLoan.com, author Kara Johnson stated “Renewal of the legislation is reportedly being held up by Rep. David Camp (R-Mich.), chair of the tax-writing Ways and Means Committee, who is said to favor allowing all temporary tax provisions to expire in order to gain leverage for more extensive changes to tax policy next year. In that event, it could be some time before a vote is taken to renew the exemption, if it happens at all.”