If the mortgage debt forgiveness programs are not approved we are in for another fiasco and disaster. Many of the Obama Administration Programs that were put into place to assist homeowners to resolve their mortgage loan problems will become obsolete because there will be no advantage to using mortgage reductions or loan modifications that reduce the principal if huge tax consequences prevail.
More homeowners will claim insolvency (meaning your debts will exceed the total market value of your assets ex: your debts $473,000 > your assets $375,000).
Mortgage Debt Forgiveness Programs
1. Homeowners will not be so willing to short sale their homes if the Mortgage Forgiveness Debt Relief Act is not implemented beginning 2013. I doubt that many homeowners would be willing to sell their homes at a loss knowing that they will be faced with a huge tax debt.
A short sale would mean that the homeowner owes more on the home than the home is worth. In short, if a homeowner owes $400,000 and agrees to short sale his home (with their lender’s approval) at $275,000, there is a $125,000 difference that would be eligible for taxable income. Assuming the homeowner is in a 30% tax bracket would mean a $37,500 tax liability.
Although President Obama has proposed an extension of the Act for 2013, the Senate and Congress must approve this necessary program to prevent another debacle.
2. Most homeowners would probably offer a deed in lieu of foreclosure because it would certainly allow them to claim insolvency, thereby eliminating any tax debt or consequences. In addition, their credit would not be severely impacted and chances of applying for another home loan in a few years would be advantageous.
Conversely, lenders are not amenable to a deed in lieu because they are not in the business of owning homes; they would prefer a short sale and therefore would be obstinate and resistant in cooperating with homeowners. This would prolong foreclosures and short sales even further.
3. The principal reduction program will become less important. Homeowners will not want to reduce their current loan balances if it means tax consequences. Unfortunately, this will only add to the current foreclosure crisis. More than likely, some homeowners would walk away and allow the lender to foreclose.
We could expect to see more blight in neighborhoods that have abandoned homes. This would cause an increase of burglaries and vandalism.
4. Homeowners will claim insolvency. The IRS will not be able to collect any income taxes when a person has claimed insolvency. The Obama Administration has fought hard to create and implement solutions to foreclosure. For that reason, it would not make not make economic sense to defeat the purpose that the government administration has been diligently working to improve the foreclosure crisis. In addition, we are currently facing an election year which means both candidates will aggressively want the support from homeowners that are facing hard times.
In my opinion, I strongly believe that the Mortgage Forgiveness Debt Relief Act will be extended through 2013. What do you think?