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Mortgage debt relief: Will Congress renew the principal reduction act?


Mortgage-debt-relief---Will-Congress-renew-the-principal-reduction-act2

Summer vacation is over and Congress is back from its brief lull. Rejuvenated after the holidays, it is faced with a burning monetary issue on whether or not to bail out millions of underwater homeowners and how to resolve their overwhelming tax obligations once the law on principal loan reduction comes into effect.

The timing of this question doesn’t get better than this. The situation is pretty sensitive since both the Bank of America (BoA) and the Department of Justice (DOJ) arrive at a settlement of a whopping figure of $16.65 billion with respect to the toxic loans that originated during the housing bubble that thought have contributed to collapse of the country’s housing industry to a great extent.

Out of the total settlement fund, around $7 billion has been set aside to extend financial help to the struggling mortgage borrowers opting for debt relief, majority of which would be used to write-off their principal balances. Similar past settlements inked with JPMorgan Chase and Citigroup were also used to cut down mortgage debts altogether.

The dilemma is this - loan balances forgiven by the banks/lenders are reported to the Internal Revenue Service (IRS) as an ordinary income. As a result, consumers who’ve accepted these mortgage debt reductions have to pay taxes on the same, as per the present tax laws prevalent in the country. However, in order to make the debt relief process all the more appealing for the distressed homeowners, Congress implemented a certain exception to the usual tax code followed by the IRS.

Thus, a new amended law came into effect and it was known as the Mortgage Forgiveness Debt Relief Act of 2007. This law was deemed annulled by the Congress in December 31st, 2013. It has not been renewed ever since in relation to principal reduction of mortgages till now this year, regardless of the debt relief option like short sale or foreclosure fervently chosen by the distressed mortgage borrowers previously.

In case the Congress fails to extend the validity of this Act, then hundreds of thousands of underwater homeowners will be burdened with overwhelming tax burden. What is more intriguing in this regard is that the debt relief act’s nine-month gap has already forced many borrowers to avoid taking advantage of the government-endorsed consumer welfare programs and with that the possibility of being charged with an equally toxic tax bill altogether has increased manifold times. This is why these borrowers instead of opting for the mortgage debt relief programs, filed for bankruptcy protection. This move by the consumers was based on the skepticism as to whether or not our Congressmen will renew the concerned law.

The crux of the matter poses a dilemma for the debt relief service providers and attorneys who feel lost when distressed mortgage borrowers arrive at their doorstep for help. One one hand, attorneys are unable to suggest underwater homeowners to opt for principal reductions due to heavy tax levies that could overwhelm them and on the other, they can’t recommend these borrowers to declare bankruptcy as per the tax code in order to have the additional tax burden relinquished.

So, what is actually happening in the Congress and how much leeway did the legislative body of our country get on the contentious topic of mortgage debt forgiveness? Simply put, the ground scenario has worsened over the past few months, thereby bringing back the entire process to square one. Prior to the session ending with commencement of summer vacation, some concrete steps were planned by the Senate. During this time, the Finance Committee gave its own recommendations and approved an “extenders” bill to renew the principal reduction act as well as 50 or more tax code programs. For instance. programs like credits for alternative energy as well as for research and development were on the anvil too.

Sadly, Majority leader Harry Reid, D-Nev., put a stop to the proposed Republican-endorsed amendment targeted to have the excise taxes levied on medical devices - a crucial source of fund for the Affordable Care Act - repealed. This happened when the Senate was about to vote in full before the onset of summer vacation. Hence, the whole bill extenders went off track.

If sources are to be believed, then Reid has expressed his desire to vote on the extenders and has also given his consent to move forward with the Obamacare amendment. However, Reid has agreed to these moves with strings attached. As per his plans, he wants the vote to be postponed until the lame-duck session commences post November elections. With the bipartisan support, the extenders bills is very likely to get the final nod at that time.

Alternatively on the House side, Ways and Means Committee Chairman Dave Camp, R-Mich., has no plan to conduct a separate vote on the mortgage debt relief issue. Moreover, he isn’t likely to block the upcoming extension of the program, provided the Senate passes the said extenders bills and forwards the same to the House.

Homeowners expecting to receive principal mortgage debt reduction from banks in the near future, along with those who’ve completed either loan modification or short sale will enjoy special protection. These borrowers will have a portion of their tax bills covered by the BoA, in case the Congress falls short of extending the mortgage debt relief law. The bottomline is that underwater borrowers who have accessed the principal reduction program or are planning to do so, will remain on the tenterhooks. Still, there is a good chance for the Congress to renew the mortgage debt relief act.

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