With a $1.3 billion tax break on write-offs of mortgage debt set to expire at the end of the year, homeowners’ and mortgage industry advocates are urging Congress to the tax break, even as lenders continue to cut loan principal in order to aid borrowers who continue to struggle making payments.
The Mortgage Debt Relief Act of 2007 allows borrowers to forgo paying taxes on their foreclosed home. However, if the act expires, homeowners will not be “forgiven,” and will have to pay taxes on the remaining principal and count the debt reduction as money earned.
The government provides lenders with much incentive to continue to modify borrowers’ mortgage payments. In January, the Treasury Department decided to pay lenders up to 63 cents for every dollar of debt that was written off. This was proven to be effective, according to the Office of the Comptroller of the Currency which reported that more than 11% of loan modifications were excused by lenders in Q2 2012, up 82% from the same quarter the previous year.
The decision Congress will make depends upon the budget negotiations, which also happens to occur during a time when debt forgiveness is quite commonplace. Those who represent the homeowners and the mortgage industry say that allowing the tax break to expire will wipe out any progress made in working through the backlog of troubled loans resulting from the housing market crisis.