Tracking Proposed Legislation to Extend the Mortgage Debt Forgiveness Relief Act into 2017

The remnants of the Mortgage Debt Forgiveness Relief Act only apply in 2017 to debts that were subject to a written agreement which was entered into in 2016. So, as of today, all new agreements that forgive debt (i.e., short sale, deed-in-lieu or mortgage modification with principal reduction) will expose the debtor to income tax, which tax will be based upon their corresponding debt savings.

H.R.110, the Mortgage Debt Tax Forgiveness Act of 2017, seeks to "amend[] the Internal Revenue Code to make permanent the exclusion from gross income of income attributable to the discharge of qualified principal residence indebtedness."

S.122, the Mortgage Debt Tax Relief Act, seeks to "amend[] the Internal Revenue Code to extend through 2018 the exclusion from gross income of income attributable to the discharge of indebtedness on a principal residence."

While H.R.110 is preferable to forever eliminate a tax on unfortunate homeowners incident to having their debt forgiven, please support either bill by contacting your local congressman and having your voice heard.

Voice Your Support for Debt Relief for Underwater Homeowners

The Mortgage Forgiveness Debt Relief Act of 2007, which provided tax breaks to homeowners who were forgiven debt resulting from loan modifications, short sales, or deeds in lieu, was not extended through 2015. Though legislation has been introduced in Congress to extend the Act through 2016, it is incumbent on the people, especially on Long Island, where foreclosure rates are still higher than the national average, to contact their representatives and voice their support for the bill.

If you want to speak to your representatives to push for an extension for this bill, there is now an easy-to-use Web app called Democracy.io that allows its users to email their House representative and senators in a group and on a simple platform instead of having to fill out clunky forms for each representative on outdated government websites. Since easy access to the government is an important way of ensuring that the people’s concerns are heard by the government, Democracy.io will soon allow its users to send letters, call, and schedule meetings with their representatives as well.

Though it is still difficult for Congressmen to filter through the millions of messages that are received every day, Democracy.io is nonetheless a step forward in the right direction. As technology becomes simpler on the constituents’ sides, Congress will need to match on its side in order to keep up with the increased flow of communications. For now, all underwater homeowners should take advantage of Democracy.io and contact their representatives about The Mortgage Forgiveness Debt Relief Act of 2007. The more support behind the bill, the more likely it will be pushed through.

You can also track the bill here. 

TAX RELIEF GRANTED FOR UNDERWATER HOMEOWNERS

Terrific news is here with a tax break for those who sold or lost their underwater homes to foreclosure in 2014.

The Mortgage Forgiveness Debt Relief Act (MFDRA) was extended through 2014 by the Tax Increase Prevention Act of 2014 on December 19, 2014.

Homeowners who were forgiven debt a/k/a “cancellation of debt income” (difference between the total amount of the mortgage still owed at closing and the sale price or fair market value of the property) resulting from a short sale, deed in lieu of foreclosure or foreclosure sale, will have the forgiven debt excluded from their taxable income for transactions completed through 12/31/2014. 

             
The MDFA previously expired on December 31, 2013.

So, for those who lost a home to foreclosure or a short sale in 2014, you will receive a nice holiday tax break when you file your taxes in the new year.  

Good Faith Decisions on Short Sales - Updates Coming 12/1/2014

Effective December 1, 2014, the Courts of the State of New York will oversee negotiations between lenders and borrowers to achieve a short sale or deed-in-lieu within foreclosure settlement conferences. The Courts are empowered to sanction parties who negotiate in bad faith.

Previously, borrowers were only allowed to attend the conferences to discuss workout options, such as loan modifications and payment plans, which would allow borrowers to keep their homes. If borrowers were denied loan modifications, their cases would be released from the settlement conference part, and they would be forced to do short sales or deeds-in-lieu on their own without court intervention or oversight. Oftentimes, these exit strategies took a very long time because many borrowers with second mortgages had difficulties settling their second mortgages or were unable to keep up with the lender’s numerous and complicated document requests. Many borrowers simply gave up and allowed their properties to go to foreclosure rather than spend thousands of dollars on legal fees for help with a short sale that was never going to be approved.

Now, with court oversight, it is anticipated that lenders will now be making quicker decisions on short sale and deed-in-lieu applications within the State of New York, and there should be fewer foreclosures overall. The court referees will set deadlines for the submission and review of short sale and deed-in-lieu applications and will ensure that the borrower is complying with the lender’s document requests and that the lender is properly reviewing the applications.

Despite this new rule, it is likely that short sales will continue to decline because the Mortgage Forgiveness Debt Relief Act of 2007 expired at the end of 2013. Under this Act, borrowers were not required to pay income tax on cancelled mortgage debt as a result of loan modifications, short sales, or deeds-in-lieu. Now that it has expired, borrowers who choose to do short sales may be hit with large tax bills after they sell their properties for less than what is owed on the mortgage. Therefore, even though the short sale and deed-in-lieu application process will be quicker with court oversight, borrowers may still choose to not move forward with these exit strategies because they cannot afford the taxes.

Foreclosure Activity is Down Nationwide

Nationwide foreclosure activity is at its lowest point since 2007. The amount of auctions, defaults, and repossessions have substantially decreased across the country. Only 17% of all mortgaged homes are seriously underwater as opposed to 29% in 2012, and negative equity is down overall.

It is anticipated that we will also start to see a decline in short sales in 2014 due to two major reasons:

a. The Mortgage Forgiveness Debt Relief Act has not been passed for 2014. This means that borrowers are liable for the income tax on the forgiven debt in a short sale. In many cases, this kind of tax bill is too high and the borrower must default on his or her tax bill. The IRS can subsequently garnish wages, freeze bank accounts, and place liens on assets without having to first obtain a judgment. Many borrowers are unwilling to put themselves in such a position and would rather let the property go to foreclosure than to have the IRS go after them for money they do not have.

b. Lenders are less likely to approve short sales today because they know they can successfully sell the properties at auction or as an REO (bank-owned property) at a higher price because fair market value for real estate is on the increase.

Please note that the total amount of foreclosures (percentage of units by area) in Suffolk County is higher than the national average and the New York State average, and the amount of Suffolk County homes in pre-foreclosure is on the rise. Overall, however, foreclosure auctions are down in Suffolk County just as the rest of the nation. Keep this in mind, brokers, as you navigate the real estate in Suffolk County.