Underwater homeowners face fiscal cliff without act's renewal
12/9/2012WASHINGTON — Patrick Boris, a banquet chef in Las Vegas, is inching closer to his own “fiscal cliff,” 2,100 miles away from the political brinksmanship under way on Capitol Hill. If Congress and the White House allow the country to go over the cliff later this month, Mr. Boris figures he could owe federal income taxes on more than $100,000 in forgiven mortgage debt following the short sale of his two-bedroom townhome next year — a personal financial “disaster,” in his words.
In the Tampa Bay area, Pam Marron, a mortgage loan officer who works with underwater homeowners seeking to avoid foreclosure, says some clients are in panic mode, terrified that Congress could force them into massive federal tax bills after their short sales. “This is ludicrous,” she said. “These people already are on the losing end. Now it could get much worse.”
Across the country, fears such as these are mounting. With the outcome of negotiations over taxes, spending and the federal debt uncertain, huge numbers of underwater owners worry that a single legislative provision that has been sucked into the “fiscal cliff” vortex could devastate them personally.
The issue is the extension of the Mortgage Forgiveness Debt Relief Act, which is set to expire Dec. 31. Dating to 2007, the law temporarily amended the federal tax code to allow mortgage debt on a principal home that is canceled by a lender through a loan modification, short sale, or foreclosure to escape taxation as ordinary income. Several bills have been introduced in the House to extend the law for at least another year. But mortgage debt forgiveness is now on hold in both chambers.
Though it's a relatively small and noncontroversial item compared with the multitrillion-dollar debates over taxes and spending, what's striking about the mortgage debt relief provision is that it potentially affects such a large group of owners and could be extremely painful.
Consider this:
• Nationwide, according to mortgage industry estimates, about 11 million owners are underwater. New data generated for this column by realty information company Zillow indicates that the average negative equity amounts of owners who are underwater — their loan balances exceed the property value — are higher than $90,000 in more than 64 local markets and more than $50,000 in 470.
• Federally regulated Fannie Mae and Freddie Mac own approximately 4 million mortgages that are underwater, and as of Nov. 1 began encouraging owners who are current on their payments but facing a financial hardship to apply for short sales that forgive their outstanding loan balances. All participants in these short sales who close after Jan. 1 could be subject to federal taxation on the forgiven balances if Congress does not extend the law.
• Forty-one state attorneys general recently appealed to the House and Senate to pass an extension so as not to disrupt the $25 billion nationwide “robosigning” settlement they negotiated with five major lenders. Among other provisions, the settlement encourages lenders to forgive billions of dollars in mortgage debt next year and beyond.
What's the outlook? There are no indications that either House Speaker John Boehner (R.,Ohio), or Senate Majority Leader Harry Reid (D., Nev.) plan a separate vote on mortgage debt forgiveness extension. Whether or not a grand bargain including an extension can be struck before the New Year witching hour is anyone's guess — and underwater short sellers’ ongoing nightmare.