Senate Approves Bill To Eliminate Taxes On Forgiven Mortgage Debt

December 17, 2007

In a move to address the subprime lending crisis and to help struggling home loan borrowers, the Senate on Dec. 14 approved legislation that would eliminate any taxes home owners might face when banks renegotiate the terms of a home loan and forgive a portion of the outstanding mortgage debt. The change in the tax law would cap untaxable forgiven mortgage debt at $2 million and apply only to principal residences. "This legislation will play a central role in helping American families avoid foreclosure and stay in their homes," said Brian Catalde, president of the National Association of Home Builders (NAHB) and a home builder from El Segundo, Calif. Existing tax rules under Section 108 of the Internal Revenue Code impel many struggling home owners to seek foreclosure over restructuring their loan with lenders because forgiven mortgage debt is taxed as ordinary income. S. 1394, the Mortgage Cancellation Relief Act of 2007, would remove this tax burden on mortgage indebtedness, encourage market-based restructuring between lenders and home owners and discourage foreclosures, said Catalde. Sponsored by Sens. Debbie Stabenow (D-Mich.) and George Voinovich (R-Ohio), the bill would provide a temporary, three-year change to the tax code to eliminate taxes on forgiven mortgage debt. For example, to keep a struggling borrower with a generally solid credit history from losing their home, a bank could elect to reduce the amount of the loan by 20 percent – from $250,000 to $200,000. While substantial, the $50,000 reduction would still be considerably less than the 30-to-50 percent loss that would be likely if the home were repossessed. The outcome, obviously, would be better for the home owner, who otherwise would lose the property. Under current tax law, the $50,000 in forgiven mortgage debt is considered taxable income. That's a deal-killer for the home owner who is already fighting just to stay afloat. "That's why we need to change the law," said Catalde. S. 1394 also includes an NAHB-supported provision that extends the deductibility of mortgage insurance for three more years. Mortgage insurance is especially critical for low- and moderate-income first-time home buyers, many of whom may not qualify for a market-rate mortgage. Catalde also urged the Senate to continue to address the housing crisis by quickly reconciling its FHA reform legislation, S. 2338, which passed last week, with its House-passed counterpart, H.R. 1852, and passing legislation to reform Fannie Mae and Freddie Mac and allow them to purchase mortgages in high-cost markets. "These three pieces of legislation are critical to help the housing and credit markets to stabilize and recover," said Catalde. "We are hopeful that the House will take up and pass the Senate debt forgiveness bill and send it to the President this week before the Congress adjourns for the holidays."

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