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Sunday, February 17, 2019

Failure to renew legislation that prevents mortgage debt relief from being counted as taxable income could destroy the fragile recovery.

The economic crisis began with the housing crisis, and it will only end when the housing crisis also ends. Unfortunately, the evidence of the past five years suggests that the Obama administration and Congress have never actually understood this connection. Despite massive numbers of foreclosures, the loss of almost $7 trillion in housing wealth (over one-half the nation’s home equity), and even unprecedented pleas from the Chairman of the Federal Reserve, there has been a shocking paucity of innovation or even policy activity in the housing arena.

Now there is a a very real chance that Congress will destroy the limited policies the Obama administration does have in place, prevent additional efforts, and further widen the gap between the haves and have-nots in America. Moreover, the net effect of this congressional failure could be to further undermine the weak housing market and risk sending the nation into another economic tailspin.

The administration’s signature housing policy effort is now aimed at mortgage principal reductions. This effort is at the core of the multi-state robo-mortgage settlement and central to the administration’s criticism of Edward DeMarco, the acting director of the Federal Housing Finance Agency. From the perspective of many analysts, myself included, the administration is finally on the right track, but its efforts are far too minimal to make a meaningful difference. Indeed, the nation’s total negative equity (the amount of mortgage debt owed which exceeds the value of the underlying properties) is presently in the range of $700 billion, and it’s likely to increase.

Nonetheless, the administration’s principal reduction efforts are a step in the right direction. These efforts open the door for the far larger, far more creative efforts that will ultimately be needed to prevent millions of upcoming foreclosures and possibly massive walk-aways from the estimated 23 percent (and increasing) of all mortgage holders — 11 million families — who are underwater.

Here’s the issue: As a general rule, any debt forgiveness is income. This means that if a home buyer borrows to buy a house and the bank forgives a portion of the loan, whether in a short sale, through debt reduction (i.e. the settlement), or even foreclosure in states that allow banks to officially choose not to seek recourse, a taxable event has occurred. The income earned is the difference between the original mortgage borrowed and the amount ultimately repaid to the bank.

For example: A family borrows $300,000 for a mortgage. The home declines in value and the bank agrees to a short sale (where the sale price is for less than the amount of the homeowner’s mortgage debt) and receives a total pay-off of $200,000. The $100,000 difference between the amount borrowed and the amount ultimately paid back is the amount of the loan the bank has forgiven. This $100,000 is a type of principal reduction and generally subject to ordinary income taxes.

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17 responses to “Americans Can’t Afford A Tax On Mortgage Relief”

  1. Lynda says:

    Sounds like an easy fix could do the trick, but that would depend on our do-nothing Congress getting off the dine and extending the program. I can’t help but wonder if that is possible. It would certainly make sense that in and election year harming the American people would not be a good idea…but does that matter to an ideologically driven party? Let’s hope so.

    • james says:

      No it doesn’t matter to the GOP, and for the life of me I really don’t understand their strategy. It really seems like they go out of their ay to stick it to the little guy, while giving the banks a free pass. But it works because somehow half of the country actually believes republicans give a damn if they live or die.

      • sarahg says:

        The truth is that this is not even close to a partisan issue. People are so foolish and blinded to think that. You have to see the bigger picture. The reality is that your elected officials, both republicans and democrats, are bought and paid for by enormous financial institutions and your representatives in turn legislate to the advantage of these corporations who are controlling your legislatures with their money and running your country. This is a grand conspiracy of epic proportions, to an extent that rises to the level of a coup d’etat, an unwitting transfer of power from the hands of the people of this country into the hands of a cynical, mencing coterie of wealthy elites. And as such, it is too deep, far, wide and systemic for it to be only one party’s policies. The highest echelons of our political leadership structures in this country are rank and have sold our country to corporate elites, the real power in this America. Don’t be a fool to think it’s only the GOP. This problem is enormous and all those on capital, on both sides of the aisle, are bought and paid for!!! Period. This is the real-politic truth of America, the land of the once free. The wealthy ruling classes have all but made war us and they have unequivocally conspired against the liberties and freedoms of the American people!!

  2. majong13 says:

    It was all the bankers and wall street brokers who took all the risk. Housing prices inflated when they kept giving out risky loans. So the economy tanks and the people who took out the loans lost their incomes, their houses, their lives and now have to pay extra taxes from income they never even benefited from. And the banks are still getting away with murder. The banks should have to pay these extra taxes.

  3. labrown69 says:

    This is true. This is why even though I despise Obama I will vote for him again. The Republicans will turn this place into Guadalajara in 4 years.

  4. howa4x says:

    Republicans represent the banks not the people so why should they help them

  5. Anyone who denies the existence of pervasive class-warfare is a POLLYANNA. Anyone who denies the necessity of class-warfare in the present socio-political context is a REPUBLICAN. Let us get on with it it is LONG OVERDUE.

  6. sarahg says:

    I completely agree with that, 100%. If these elitist vermin in office continue to urinate on the people of this country, they are going to pay dearly. The people of America have absolutely had it with this baby boomer generation and their psychotic, unbridled greed and selfishness that has left our lives, families and communities in a state of emergency and devastation. The truth is that this administration has not done a damned thing to actually help Americans out of this nasty nightmare we’re all in. No bail out for the people, but loads and loads of welfare bail out money for the very cynical, filthy dirt bag elitist robber barons who destroyed our country. I think it is beyond shocking that the administration has barely publicly acknowledged how devastating the real estate/banking crash and the ensuing foreclosure crisis is. It is the key to economic recovery, but these filth will do nothing.

    • AdamMos says:

      Look up ALEC and then tell me this is a bypartisan issue. It is not. The republicans are bought and paid for by the corporations and the democrats are funded by the unions. It is the classic struggle between management and labor. Our current administartion has been handed the worst economy concievable in all areas, housing, unemployment , national banking system on the verge of collapse , prohibited from fixing it and then blamed for it. The republican tea party is fascist and will block every any effort that Obama will try to improve the economy. They would vote against honoring Motherhood if this administration authored it.

  7. jlelandthomas says:

    I don’t know how you can get an HONEST figure out of that since past President Busch Did nothing but let it happen or are just counting from that and not into that get it straight and be honest stop STEELING credit for the GOP that is holding this country back because they stand to have to pay their far share of taxes

  8. jerder says:

    How hard would it be to pass a temporary halt to the law that includes debt forgiveness as income for two or three years? Oops! I forgot, the G.O.P. is in control of congress and their idea of tax cuts only applies to multi-millionaires, billionaires, wealthy investors, and corporate entities like big oil. By altering this law, it would actually be a ‘tax break’ for homeowners who may lose their homes. Doubt the G.O.P. lets that happen. They are so focused on taking the presidency while holding onto their majority in the house, that they would let average Americans suffer to make it happen.

  9. noelle99 says:

    Funny how you can’t get a look in for a refi on your under water mortage now, let alone new mortgage, unless your income is around 8k a month and you are at 80/20, which of course by the very nature of this mess, few people are.
    The same people who were giving mortgages to anyone who asked 8/9 years ago won’t give you the time of day. They took the money and ran, knowing it was a can of worms, now the rules are so strict you have to be Donald Trump to get a mortgage. These people who make and then remake the rules for the benefit of themselves should be hung drawn and quartered. The people responsible got away with no dire consequenses for themselves, while millions of hoodwinked homeowners pay the price. The banks don’t care because the penalties were not anywhere near stiff enough on them, of course.

  10. joyscarbo says:

    I’m not ashamed to admit that I’m upside down on my mortgage and behind on my payments because of 9 months of unemployment. I’m working with my lender, Wells Fargo, who have given me hope by offering government subsidized loan modification. I’ve been denied assistance twice. I don’t know anyone who has been approved to participate in these special programs that are suppose to help those who are struggling.
    Has anyone out there been helped by one of these “government funded” programs designed to help struggling home owners stay in their house and avoid foreclosure?

    • ObozoMustGo says:

      Hi Joy! I’m sorry to see your predicament. I’m not behind in my mortgage at all and am underwater a little bit, but am looking to drop my rate from 6.125 to 3.8 at this point. Waiting on approval. When Obozo came out with the first program, we looked into it but they were trying to encourage me to NOT pay my mortgage and get behind on it in order to qualify. That’s not my style. I pay what I owe. Period!

      But to answer your question, I dont know anyone that has gotten a government program for their mortgage. And when I looked into it, it was a bunch of crap! I honestly think the marketing guys that run elections come up with this stuff so it sounds good at election time, but in reality is nothing but smoke and mirrors.

      I’ll say a prayer for you and your employment prospects. I wish you well on your refi efforts. 🙂

      Have a nice day!

  11. noelle99 says:

    It’s just more red tape, too many rules and restrictions. Not designed to help your average Joe. Whoever writes these programs are completely out of touch with reality.

  12. ObozoMustGo says:

    This form of taxation is rather insideous. I have been a victim of the same thing, but with stock options. I worked for a high flying internet company and had thousands of options priced very low. Stock skyrocketed. I was young and naive and decided to exercise to buy. Spent a lot of my own money to take ownership of the shares while the market price was through the roof. Dot Bomb hit, shares went to almost zero. I lost most of my cash investment. Tax time came around. I got a statement that said I had capital gains of near $300,000 when I NEVER saw a stinking penny. They say I experienced the gains on the day I exercised to buy, even if I never took the gains. Run it through the tax forms and all of sudden I owe uncle same $110,000 on 4/15. SURPRISE A$$HOLE… MEET UNCLE SAM AND PREPARE TO GET SCREWED WITHOUT LUBE!!!!

    Now, they are so generous that I can write off that amount against my income every year UP TO…… get this…… $3000 per year! ARENT THEY JUST SOOOOO FRIGGIN GENEROUS??????????

    This was the precipitating event that turned me from a liberal into a conservative. Well, that and 9/11 combined in the same year. For many of you on the left, you dont realize that there IS a difference between conservative and Republican. This is when I realized that it’s all a game and those jerks in DC only want to continue their power hungry reign, regardless of which party. They want us bickering with each other over the small stuff while they continue to rob the store blind.

    While I understand the concept that forgiven debts are income, it’s ABSOLUTELY NOT income for people that are under water on their mortgages. Especially mortgages on primary residences. In reality, if the debt forgiven is income, then the associated decline is value is an equal LOSS on the investment. Thus, it is a net wash and therefore should not be taxable. Does this make sense? I hope so.

    The one good thing is that no one has the political will to let this so-called “tax break” expire. I dont know a single Republican that wants the higher taxes and I dont know of a single Dem that doesn’t want to appear be helping the “small guy”. So, in truth, the article may be a bit of fear mongering, but it does bring up a good point.

    On this, I think we can all agree.

    Have a nice day!

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