Passage of Law Means Relief for Distressed Homeowners

The Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) was signed into law by President Bush on Dec. 20, 2007 and was the gift that homeowners were anxiously waiting for.  Many homeowners caught between a rock and a hard place (more specifically declining home prices and rising mortgage payments) now have a sale option available to them which has been made considerably less painful with the passage of the law.  It usually came as horrific shock, adding insult to injury, that in selling ones home for less than the outstanding mortgage balance against it (what is commonly referred to as a short sale) meant that the homeowner received an IRS Form 1099 for the difference and which was then taxed as ordinary income because it was consider something called “phantom income” to the poor homeowner who unfortunately had to pay real rather than phantom income taxes on.  But with the passage of The Mortgage Forgiveness Debt Relief Act of 2007, this horror has been temporarily suspended from January 1, 2007 through December 31, 2009 and applies to homeowners whose debt forgiveness was granted by their lender due to a decline in their property value which adversely impacted their acquisition (or purchase loan) debt.  The act does not apply to refinanced debt nor does it apply to investors of income property.

It is anticipated that passage of this law will help many homeowners who were strapped by their rapidly increasing mortgage payments and may have been hesitant to sell or get out from under their mortgage debt unless they could sell their home for a price equal to or greater than their mortgage balance for fear of being left with a hefty tax bill for the difference.  With home prices having fallen in many areas of the country, back down to levels seen prior to 2005, it appears that short sales are likely to remain at the forefront of many sale transactions in the coming years.  The majority of short sales seem to impact those homeowners who either purchased or attempted to refinance and take the maximum amount of cash out of their property at or near the peak of the market.  However short sales also result from life’s unexpected bumps in the road including: the loss of a job, divorce or in some instances deportation.  As an added argument in favor of short selling, a homeowner’s credit score is not as negatively effected by the short sale process as it is in the foreclosure process, resulting in a hit (or decrease) of up to 100 points to the score after a short sale and up to a 280 point hit to the score after a foreclosure.    

For more detailed information on the law, go to:
http://www.govtrack.us/congress/bill.xpd?bill=h110-3648&tab=summary

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