New Law Brings Relief to Strapped Subprime Borrowers
NAHB achieved a major victory in its bid to address the subprime lending crisis when Congress on Dec. 18 approved legislation to eliminate taxes on mortgage debt. For months, NAHB lobbied the Congress to approve this measure, noting that it would help struggling home owners to avoid foreclosure.
“This bill helps to address the subprime lending crisis by preventing strapped home owners from taking a significant tax hit to restructure their mortgages and allowing them to stay in their homes,” said NAHB President Brian Catalde.
The legislation, which was subsequently signed into law by President Bush on Dec. 20, provides a temporary, three-year change to the tax code to eliminate any taxes home owners might face when banks renegotiate the terms of a home loan and forgive a portion of the outstanding mortgage debt. The change in the tax law caps untaxable forgiven debt at $2 million and applies only to principal residences.
Tax rules under Section 108 of the Internal Revenue Code forced many struggling home owners to seek foreclosure over restructuring their loan with lenders because forgiven mortgage debt was taxed as ordinary income. H.R. 3648, the Mortgage Forgiveness Debt Relief Act, removes this tax burden on mortgage indebtedness, encouraging market-based restructuring between lenders and home owners and discouraging foreclosures.
For example, to keep a struggling borrower with a generally solid credit history from losing their home, a bank could elect to cut its loan by 20% — from $250,000 to $200,000. While substantial, the $50,000 reduction would still be considerably less than the 30% to 50% loss that would be likely if the home were repossessed. The outcome, obviously, would be better for the home owner, who otherwise would lose the property.
Under Section 108, that forgiven $50,000 in forgiven mortgage debt is considered taxable income, and Catalde called that a “deal killer for the home owner who is already struggling just to stay afloat.”
The legislation also includes an NAHB-supported provision to extend the deductibility of mortgage insurance for three more years. “By enabling mortgage insurance premium payments to be deducted, homeownership is made more affordable for thousands of families who now will be able to buy a home without having to resort to more costly subprime or predatory alternatives,” Catalde said.
Extending Relief on Alternative Minimum Tax Relief
On another issue of concern to the nation’s home builders, the House on Dec. 19 approved H.R. 3996, the Temporary Tax Relief Act of 2007. The bill extends short-term relief from the Alternative Minimum Tax (AMT) for another year, preventing an additional 20 million Americans from being subject to the tax.
In order to move the measure forward and avoid a possible veto by the President, the House agreed to Senate changes that stripped out $50 billion in revenue-raising offsets to pay for the bill.
However, House Democratic leaders, who insist that pay-as-you-go budget rules are essential to enforcing fiscal discipline and not adding further to the national debt, said they planned to revisit the issue this year when they seek to retroactively restore a number of tax provisions that expired at year-end.
Several of these expired tax breaks are of interest to NAHB, including brownfields expensing, New Market Tax Credits and leasehold improvements. When House tax-writers move to restore the expired tax provisions, they will also try to come up with $50 billion in spending cuts and revenue raisers to pay for the one-year AMT patch.
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For more information, e-mail Greg Brown at NAHB, or call him at 800-368-5242 x8421.