Mortgage Forgiveness Debt Relief Act

On December 18, 2015, President Obama signed a bill that extended the 2007 Mortgage Forgiveness Debt Relief Act through December 31, 2016. The extension also retroactively covers mortgage debt cancelled in 2015.

This law excluded income (up to $2M, $1M married filing separately) from a modification of the mortgage, or foreclosure on your principal residence, as detailed in IRS Publication 4681.

Struggling Homeowners may also seek relief through the IRS Insolvency Clause if their total liabilities are greater than their debts, to avoid paying taxes (as income) on the forgiven debt. You are advised to consult your attorney and qualified  professional sources to make this determination.

The call is upon Congress to act, maintaining this esource, as thousands of homeowners continue to suffer the damage of negative equity in their homes. Should Congress fail to act, many people may choose the long path of foreclosure instead of working with their lenders to efficiently resolve their current situation.    

A potential delay in resolution of housing values may occur as struggling homeowners choose to navigate the foreclosure process in judicial states, such as Connecticut. Foreclosures can increase inventory and lower prices over the time their presence affects the market because lenders may be more motivated, or able to sell for less than a homeowner. I recently viewed a short sale listed for $207K (with $280K debt from 2006) on the same street an almost identical property with better land attributes and interior amenities was listed for $153K, needing cosmetic improvements 

You may know, or have heard stories of somebody who is living in their home without paying the mortgage today. Rumor has it there are significant numbers of people in this situation, playing a stressful waiting game with their bank as they struggle with unemployment, health issues, or just save mortgage payments for future expenses, or pay off other, non-secured credit.

Banks are also waiting to decide what they should do, as a foreclosed property decreases portfolio value, while a property has not been foreclosed may support values because the note may be considered curable. This means if a lender has 1000 properties valued at $300,000 they are holding $300,000,000 in secured debt. If the value of those properties declines 50%, the actual value becomes $150M, a ledger loss of $150,000,000 to the lenders and investors.

The depth and extent of these properties and people not paying mortgages is difficult to determine because the relationship between the borrower and bank is confidential until made public in court. The number of potentially affected homes is commonly referred to as “Shadow Inventory.”

Struggling homeowners have seen the value of their property decline as much as fifty percent from 2004 through 2013, yet continued to pay their mortgage as they attempt to renegotiate the terms of their mortgage. Many borrowers have been successful, taking advantage of HAMP and HARP programs to lower their interest rates to historic lows, often below 3%. This is the best, most responsible route a borrower can take, followed by a petition for principal reduction, or debt cancellation, based on current market values.

in 2013 the increase in FHFA housing values has been mixed across the country. New England is trailing the double digit, one year appreciation (as of 3Q2013) found in the 12 most appreciating states; NV+25%, CA+22%, AZ+15%, FL, WA, DC, UT, OR, MI & GA, all >11%, then HI & CO >10% all ending 3Q2013.

The 7 least appreciated states in the country ending 3Q2013 are MS+1.3%, WY+1.3%, NM+2.1%, CT+1/7%, DE+2.3%, VT+2.7% and NY+2.9%. Showing stronger improvement, MA+6.2%, NH+5.9%, RI+6.6% round out New England. We may be seeing a more stable future in underappreciated states compared to states with greater short term increases.

Real Estate is a much localized market with unique values, so your experience will be affected by your local economy and personal situation. David Carr has practiced Connecticut Licensed Real Estate Agency at Berkshire Hathaway, representing buyers and marketing property in New Haven County since 1997.

Regardless of where you live, the importance of returning to a stable housing market is essential to long term economic recovery. Historic home value appreciation around 5% (compounded) is considered sustainable, yet that level was last experienced in the 1990’s.

Now is the time to work toward that goal again, by encouraging Congress to extend this resource so more people can experience confidence in the multiple values of a home. CopyrightÓ2016 by David Carr. All Rights reserved.