Congress Passes Mortgage Debt Relief to Help Strapped Borrowers

Business Wire, Dec 18, 2007

WASHINGTON -- The National Association of Home Builders (NAHB) today applauded Congress for passing legislation to eliminate taxes on mortgage debt, noting that it will help struggling home owners to avoid foreclosure.

"This bill helps to address the subprime lending crisis by preventing strapped home owners from taking a significant tax hit to restructure their mortgages and allowing them to stay in their homes," said NAHB President Brian Catalde, a home builder from El Segundo, Calif.

The legislation, which is expected to be signed into law by President Bush, will provide a temporary, three-year change to the tax code to 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 will cap untaxable forgiven debt at $2 million and apply only to principal residences.

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.

H.R. 3648, the Mortgage Forgiveness Debt Relief Act, removes this tax burden on mortgage indebtedness, encourages market-based restructuring between lenders and home owners and discourages foreclosures, said Catalde.

For example, to keep a struggling borrower with a generally solid credit history from losing their home, a bank could elect to cut its loan rate 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, that forgiven $50,000 in forgiven mortgage debt is considered taxable income. That's a deal-killer for the home owner who is already struggling just to stay afloat.

"For families already struggling to make ends meet, the phantom income and resulting tax burden generated by Section 108 can endanger their financial health even further," said Catalde. "That's why it was so important for Congress to act."

The legislation also includes an NAHB-supported provision that extends the deductibility of mortgage insurance for three more years. "By enabling mortgage insurance premium payments to be deducted, homeownership is made more affordable for thousands of families who now will be able to buy a home without having to resort to more costly subprime or predatory alternatives," said Catalde.

To further address the housing crisis, Catalde called on the House and Senate to move quickly to reconcile pending FHA reform legislation and urged the Senate to pass legislation to reform Fannie Mae and Freddie Mac and allow them to purchase mortgages in high-cost markets.

"These three pieces of legislation - mortgage debt forgiveness, FHA modernization and GSE reform -- are critical to help the housing and credit markets to stabilize and recover and to keep the economy moving forward," said Catalde.

ABOUT NAHB: The National Association of Home Builders is a Washington-based trade association representing more than 235,000 members involved in home building, remodeling, multifamily construction, property management, subcontracting, design, housing finance, building product manufacturing and other aspects of residential and light commercial construction. Known as "the voice of the housing industry," NAHB is affiliated with more than 800 state and local home builders associations around the country. NAHB's builder members will construct 80 percent of the more than 1.36 million new housing units projected for 2007.