Like carnival barkers at the county fair, mortgage brokers and realtors are urging underwater homeowners to hurry, hurry, hurry on their short-sale plans.
The reason for the rush: the Mortgage Forgiveness Debt Relief Act is set to expire at the end of the year. This temporary tax code revision has exempted millions of homeowners from taxes on canceled mortgage debt through foreclosures, short sales or loan restructuring.
With short sales often turning into a protracted process, real estate advisers have been urging homeowners to get started-immediately-on marketing their homes, in case Congress decides against approving an extension past December.
To some, this seems like hype from an industry looking to light any fuse on housing sales. The 2007 exemption already has been extended once and is not considered costly. According to Congressional estimates, tax receipts from the forgiven debt would total only $1.3 billion from 2008 to 2017.
The tax exemption also has attracted bipartisan support. Then again, bailouts once did, too, as did payroll tax deductions. And the notion that Congress would ever threaten to default on U.S. debt was once inconceivable as well.
"It's been extended before, and my assumption is they will" extend it again, Brent White, a professor at the University of Arizona's Rogers School of Law, says of the tax exemption. "But who knows with this Congress."
Extending relief to stressed homeowners does seem a no-brainer with millions of mortgages still underwater. But at the start of the 2012 Congressional calendar year, there appeared to be little discussion of the matter in policy circles, and lobbying plans by trade groups like the National Association of Realtors and the Mortgage Bankers Association were only in their nascent stages.
Even if the issue had generated more buzz by now, some observers question whether a House agenda under Republican control would include a measure top leaders believe might encourage irresponsible homeowners to walk away from their obligations scot-free. "There's a camp that blames some of the default activity on ... having the Mortgage Forgiveness Debt Relief Act in play," says Anthony Sanders, a real estate professor at the Mercatus Center at George Mason University.
Just how large that camp is remains unclear. Only 27 Republicans voted against the original 2007 bill, which was written by Rep. Charles Rangel, D-N.Y., and handily passed the House before sweeping through the Senate with unanimous consent. But that was before the Tea Party.
Moreover, a look at the 2007 roll call shows that two of the "no" votes came from GOP members who are now heavyweights on the Ways and Means Committee-through which the original bill traversed. Aides to these two legislators, Rep. David Camp of Michigan, the Ways and Means Committee chairman, and Rep. Kevin Brady of Texas, the GOP deputy whip, did not respond to questions about whether they would support an extension, or would at least consider one. Both men are on record having signed an opposition statement attached to the original legislation highlighting concerns that the temporary measure could morph into a permanent entitlement, creating "an environment where the American tax system is complicit in promoting 'risk-free' mortgages."
Camp has since been unsympathetic to many homeowner relief measures proposed from across the partisan divide. He voted to kill the Home Affordable Modification Program (HAMP) and to deny federal bankruptcy judges "cramdown" powers, in which they could mark down the amount owed on a mortgage to the current market value of the property.
Economists and housing trade organizations have credited the tax exemption (which was extended through 2012 in the 2008 Emergency Economic Stabilization Act) with providing a small tonic to the housing crisis by making short sales more tenable for homeowners. There have been 1.6 million short sales reported by NAR since late 2008, accounting for between 10 percent and 14 percent of home sales activity each month during that time.
Without the exemption, forgiven debt in a short sale would be treated as a phantom, but taxable, capital gain, which for some homeowners in dire housing markets might total tens or hundreds of thousands of dollars. Under those circumstances, in most states, the only option for homeowners to escape a mortgage obligation and the resulting taxes would be bankruptcy. (That is, barring the implementation of any modification or principal reduction programs recently proposed by the Obama administration.)
In non-recourse states such as California and Nevada, where lenders cannot pursue a deficiency judgement to collect the unpaid debt on a residential mortgage, lifting the tax exemption actually could result in more foreclosures. That's because a short sale would trigger taxes on the unpaid debt, while in those non-recourse states, a foreclosure would not. "It's not in the homeowner's interest anymore to do" a short sale, says White.
Several economists, as well as the trade groups for realtors and mortgage bankers, say that continuing the tax exemption is a crucial cog in the housing recovery.
"Of all of the different things that policymakers have done to address the housing crisis, this has been one of the most effective," says Mark Zandi, an economist with Moody's Analytics. "It's not very costly to the IRS or taxpayers, and it's very, very helpful in trying to facilitate working through this very serious problem."
The MBA's support of an extension is particularly notable, given its concern with strategic defaults that some believe the exemption may be stoking. "We continue to support reasonable measures" for recovering homeowners, says David Stevens, president and CEO of the MBA and recently the assistant secretary for housing in the Obama administration.
This spring, NAR will make an extension a priority item for the group's 2012 congressional wish list. "It's like the old medical term: first do no harm," says Moe Veissi, NAR's president. "In this housing marketplace, as uniquely difficult as it's ever been, this is the wrong time not to extend it."
Glen Fest is the executive editor of American Banker Magazine.
