President Bush made several proposals late last week to relieve homeowners from the burden of the imploding mortgage market, just in time to grab Congress's attention as it returns this week from summer recess.
Some of his critics have called his proposals too little too late. But they still could help homeowners if they are passed quickly, now that Congress is back in session. People are worried about their mortgages and the value of their homes as they see mortgage companies going out of business and banks getting tighter with their lending terms.
One of the proposals that stands a good prospect of passage echoes bipartisan legislation pending in both houses of Congress to change a provision of the Tax Code so it doesn't punish homeowners who are forced to sell their homes for less than their mortgage is worth. Under current tax law, canceled mortgage debt on primary residences counts as taxable income. So if the bank forecloses on a home and the bank forgives the $50,000 remaining on the mortgage, a homeowner can still get hit with a tax bill for the $50,000 in taxable income.
Bush has proposed that canceled mortgage debt not be counted as income. A similar proposal has also shown up in bills sponsored by Debbie Stabenow, D-Mich., and George Voinovich, R-Ohio, in the Senate, and by Rob Andrews, D-N.J., and Ron Lewis, R-Ky., in the House.
Other proposals include foreclosure avoidance initiatives to help struggling homeowners find a way to refinance, and a Federal Housing Administration initiative called FHASecure to help people who have good credit but who have not made all their payments on time because their mortgage payments have been rising.
Some of the proposals are controversial. Critics charge that they are effectively bailing out homeowners who should have known better before they signed deals that seemed obviously too good to be true. Others resent the possibility that the initiatives could help housing speculators who were simply gambling on the real estate market and planning to flip the property as soon as they could get away with it.
Much of the blame lies at the feet of the sub-prime mortgage industry, however, which generated fat profits for many financial institutions and mortgage brokers. Many homeowners also found themselves the victims of unscrupulous salespeople who misrepresented the terms of the financing and convinced mortgagees that they could always refinance whenever their payments became too high.
Whatever the case, the tax reform proposals at least seem reasonable, and more importantly they enjoy bipartisan support. They prevent the IRS from penalizing taxpayers who may have already lost their homes and don't have the money from the sale of the home to pay the tax bill anyway. While lenders are required by law to file a Form 1099 when they forgive a debt, that doesn't necessarily mean the debt should be treated as taxable income. That's especially true when the former owner never saw any profits from the sale of the home that was lost. By passing the legislation, President Bush and Congress will also be able to demonstrate that they recognize the problems afflicting homeowners who worry they may have gotten in over their heads with ballooning mortgage payments.
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