Attorneys General Petition Congress for Troubled Mortgage Tax Relief

Today, some six years after the start of the housing market meltdown, millions of Americans are still struggling to deal with underwater mortgages, home loan delinquency and default. As such, some officials believe Congress should do more to help troubled homeowners.

There are a number of tax breaks designed specifically to help consumers who are still struggling with mortgage problems that are set to retire at the end of the year, and if they do, that could create massive financial problems for many who are already stressed, according to a letter sent to lawmakers by the attorneys general from 40 states as well as Guam. These tax breaks were built into the Mortgage Debt Relief Act of 2008, and allowed home loan balances forgiven for several different reasons — such as through a short sale — to be excluded from a person’s taxable income.

“A home lost to foreclosure depresses future home sale prices, damages the value of surrounding homes, and harms families, neighborhoods, and our general economy,” the attorneys general said in their letter, which was addressed to several leaders in both the U.S. House of Representatives and Senate, including House Speaker John Boehner and Senate Majority Leader Harry Reid. “Requiring a homeowner to pay income tax on forgiven or canceled mortgage debt would make the National Mortgage Settlement much less effective.”

The Problem with the Expiration

The reason these tax breaks are up for expiration at all is likely because of the partisan fight over the looming fiscal cliff. This debate revolves largely around the federal government’s deficits, and there is considerable debate between Republicans and Democrats regarding which programs and tax breaks should face the chopping block. But the attorneys general say that because this particular set of tax allowances are designed to help only those already facing severe financial constraints, it should continue for the foreseeable future.

This may be particularly true because, if the breaks expire, many struggling homeowners might not even know of their obligation to pay for their forgiven mortgage debt, and might face some shock and additional financial burdens when their tax bill arrives, the report said. Further, in the grand scheme of things, allowing the breaks to expire wouldn’t save the government much money, but on a personal level, the difference for a troubled family can be massive,

“Unless Congress acts, all of the remaining debt relief to be provided in 2013 under the National Mortgage Settlement, as well as other mortgage debt relief programs, will likely be considered taxable income,” the letter said. “Failure to extend this tax exclusion will result in $1.3 billion in tax increases on the very families who can least afford it.”

Why Attorneys General are Particularly Opposed

The top lawyers in these 40 states and one territory may have more skin in the game than other government officials when it comes to making sure these tax breaks remain firmly in place, the report said. That’s because it’s been less than a year since attorneys general from 48 states signed the massive national mortgage settlement with the five largest home loan servicers in the country. That agreement, which took months to arrange, allowed states to collect more than $17 billion in mortgage relief from those financial institutions, which included debt reduction and other forms of assistance to troubled homeowners.

Therefore, these officials are worried that by allowing the tax breaks in question to expire on December 31, Congress would essentially be shifting a greater financial burden back to the borrowers their agreement was originally designed to help, the report said. There is also some concern that consumers who are set to receive relief through the settlement might be deterred from participating as a result of the massive tax bills they might receive if the allowances in the Mortgage Debt Relief Act expire.

Going forward
Many housing experts say that while recovery in the mortgage market is now well under way, it is also quite fragile at this point. Rising prices have brought millions of previously underwater homeowners back to being right side up in terms of what they owe versus the value of their property, but in many areas across the country, this remains of the utmost concern to many borrowers. Further, while instances of delinquency and default have generally fallen as the economy improves, a large number of Americans are still behind on their payments, many by a few months or more.

Late payments on any loan type can take a massive toll on a borrower’s credit score, but so too can unfair markings on their credit reports. As such, it may be vital for borrowers to order copies of these documents regularly and check them for these entries. If any are discovered, working with a credit repair firm may help to clear them up.

Posted in Mortgages
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