Washington – Financial relief for homeowners facing foreclosure or in bankruptcy advanced in the House on Thursday when it approved legislation to help strapped home owners.
The bill, passed 386-27, would give a tax break to homeowners who have mortgage debt forgiven as part of a foreclosure or renegotiation of a loan. No taxes would be owed on the value of any debt forgiven or written off. Currently, such debt forgiveness is taxable income.
While the measure is anticipated to reduce taxes of some strapped homeowners by $650 million, the cost to the government would be offset in part by limiting a tax break available on the sale of second homes.
“Families dealing with the pain of a foreclosure should not have the ‘double whammy’ of a large tax bill,” said Rep. Charles Rangel, D-N.Y., chairman of the House Ways and Means Committee and co- sponsor of the bill.
President Bush praised the House action.
“I urge the Senate to swiftly consider this legislation and make it temporary,” he said in a statement.
The House vote was the latest congressional reaction to a mortgage crisis touched off last spring by a blowup in high-priced home loans for risky borrowers, throwing a pall over the economy.
Foreclosures are at record highs, and late payments are spiking. Lenders have gone under, and investors have taken huge financial hits.
An estimated 2 million to 2.5 million adjustable-rate mortgages – worth some $600 billion – will jump from low initial “teaser” rates to higher rates this year and next. Steep prepayment penalties have made it difficult for some to get out of their mortgages, and some overstretched homeowners can’t afford to refinance or sell their homes.
To help offset the $650 million in tax revenue, the legislation makes it harder to get breaks on capital-gains taxes for the sale of second homes. The White House supports the measure but wants mortgage relief to be in effect three years, not permanent as approved in the House. Bush also is against limiting tax breaks on the sale of second homes.
The Mortgage Bankers Association expressed strong support for the bipartisan tax-relief bill but fiercely criticized another measure, opposed by Republicans on a House Judiciary subcommittee that narrowly approved passing it to the full committee.
That measure, which faces a contentious future in Congress, would revise the bankruptcy code to aid homeowners facing default and foreclosure. If enacted, it would further trim profits at hard-hit mortgage lenders.
The bill would allow judges to order mortgage lenders to ease terms for homeowners in bankruptcy proceedings. Currently, mortgage lenders can foreclose against a homeowner in default 90 days after a bankruptcy filing.
Mortgage lenders would be “terrified” of getting wrapped up in bankruptcy proceedings, said Brian Gardner, a research analyst with investment firm Keefe, Bruyette & Woods.
