But the Senate committee managed to pull together enough votes Aug. 2 to pass the debt-relief extension after heavy lobbying by the National Association of Realtors and the National Association of Home Builders. The bill, which now moves to the full Senate for possible action next month, also would extend tax write-offs for mortgage insurance premiums for 2012 and through 2013, and it would continue some energy-efficiency tax credits for remodelings and new-home construction.
The mortgage debt relief extension ultimately could affect millions of families who are underwater on their loans, delinquent on their payments and heading for foreclosure, short sales or deeds-in-lieu-of-foreclosure settlements. Under the federal tax code, all types of forgiven debt are treated as ordinary income, subject to regular tax rates. When an underwater homeowner who owes $300,000 has $100,000 of that forgiven as part of a modification or other arrangement with the bank, the unpaid $100,000 balance would normally be taxable.
But in 2007, Congress saw the fast-mounting distress in the housing market on the horizon and agreed to temporarily exempt certain mortgage balances that are forgiven by lenders. The limit is $2 million in debt cancellation for married individuals filing jointly, $1 million for single filers. This special exemption, however, came with a time restriction. The current deadline is Dec. 31. Without a formal extension by Congress, starting on Jan. 1 all mortgage balances written off by banks would be fully taxable — a nightmare scenario that has had financially stressed homeowners worried for months.
These apprehensions were raised even higher when some policy analysts predicted that a Congress as fractious and dysfunctional as the current one would never get its act together to pass any tax bills until the closing moments of the lame-duck session expected after the November election. Even then, with such issues as the mounting federal debt and draconian spending cuts scheduled for Jan. 1 taking precedence, smaller matters such as mortgage debt relief might well be lost in the dust storms, experts predicted.
A few Republican policy strategists, including Douglas Holtz-Eakin, former Congressional Budget Office director and economics adviser to Sen. John McCain’s presidential campaign, speculated that tea party freshmen in the House might oppose the debt-relief extension because they see it as another costly bailout funded by taxpayers. The estimated revenue cost to the Treasury for a two-year extension is $2.7 billion.