No time to cut loose 'underwater' homeowners
While the failure of Congress to pass a bill extending benefits to the long-term unemployed received considerable news attention last week, more perplexing but less publicized was the inaction that led to the expiration of a tax law that was helping struggling homeowners.
There was some logic, at least, behind the action of House Republicans in blocking a bill to extend unemployment benefits. Some Republican congressional representatives demanded offsetting spending cuts to counteract the additional money spent on unemployment. Many economists warn this is not good public policy because the cuts imposed by sequestration are already acting as a drag on the economy, inhibiting the recovery.
Other Republican lawmakers argue that extending benefits is encouraging some to live without having to work. This ignores data showing the longer one is unemployed the harder it is to land a job. It is also insulting to the vast majority of the chronically unemployed who want to work and keep trying, they just can't get hired.
But at least these are arguments.
The Republican House leadership is offering no good reason why they let the Mortgage Forgiveness Debt Relief Act expire at the end of 2013. It has proven successful in sparing homeowners who are underwater - they owe more than their home is worth - from facing extra taxes when their banks provide mortgage relief.
These homeowners often negotiate with their banks to sell their homes for less than they owe in a "short sale" or have their mortgage balance reduced in line with true value. Under federal tax law, however, the difference between what the owner owes and the lower value OK'd by the bank is considered income, subject to tax by the IRS.
Take for instance someone with a $200,000 mortgage who is allowed to sell for $160,000. The result is $40,000 in additional "income" subject to taxation. It is not hard to understand why that would discourage making such a deal, resulting in more of the house-sale stagnation that is hurting the real estate market.
The debt relief act, approved in 2007, exempts such "income" from taxation. Now the law is gone, but the problem is not. More than 6 million homes are still underwater, down from 11 million, but still a lot.
According to the Connecticut Multiple Listing Service Inc., as of Jan 2 in Connecticut (excluding Fairfield County) there were 772 short sales under deposit, an additional 1,012 on the market. Unless the tax provision is renewed, these sellers will be subject to pay federal income tax on the debt forgiven in the short sale. Certainly, some may opt to pull their homes off the market.
Debra Chamberlain, president of the Connecticut Association of Realtors, said the failure to renew the tax provision is a big mistake.
"To expect these families to pay federal income tax on money they have not truly received at a time when they have used up their financial resources in an effort to hang on to their homes … will only cause further distress to them. It will also slow the recovery of the overall market and economy at a time when we have finally begun to see slow but steady improvement," said Chamberlain in a statement included in a release from U.S. Rep. Joe Courtney's office.
Courtney, a Democrat representing eastern Connecticut's 2nd District, is co-sponsoring legislation to extend the debt relief act to continue to exclude from taxation the discharging of debt from short sales, mortgage restructuring or as part of foreclosures.
He notes that the mortgage break was among 55 tax provisions, providing various pro-growth incentives, that the House Republicans let expire due to inaction, living up to the reputation as the do-nothing Congress.
Certainly not all of the tax incentives were necessary, but the mortgage debt-relief rule was working by doing something Republicans supposedly stand for - providing tax relief. Yet it does not show up on House Majority Leader Eric Cantor's "January Legislative Agenda" sent to fellow House Republicans.
Paul Choiniere is editorial page editor.
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