Washington Update - 10/05/2007 (Plain Text Version)

View Graphical Version | Subscribe to NAHB Publications | E-mail Our Editor
NAHB Home Page | Browse Other NAHB e-Newsletters | Search Back Issues

Mortgage Debt Forgiveness Bill Sails Through House

NAHB-supported legislation to help ease the credit crunch situation was overwhelmingly approved by the House of Representatives on Oct. 4 in the form of a bill that eliminates taxes on forgiven mortgage debt when banks renegotiate the terms of a home loan. This change in tax law, which would cap untaxable forgiven debt at $2 million and apply only to principal residences, will play a central role in helping American families avoid foreclosure and stay in their homes. The legislation, which passed, 386-27, is needed because existing rules under Sec. 108 of the Internal Revenue Code impel many struggling home owners to seek foreclosure over restructuring their loan with lenders due to the fact that forgiven mortgage debt can be taxed as ordinary income. H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007, would remove this tax burden on mortgage indebtedness, encourage market-based restructuring between lenders and home owners, and discourage foreclosures. It's also in keeping with one of the key policy provisions approved at NAHB's Fall Board of Directors Meeting to address the mortgage credit crunch.

The same bill also includes an NAHB-supported provision that extends the deductibility of mortgage insurance, thereby making homeownership more affordable to thousands of additional families who would otherwise have to resort to more costly subprime or predatory alternatives. The current deduction, which is set to expire on Dec. 31, would be extended through 2014 under this legislation.

To cover the estimated $2 billion 10-year cost of the overall bill, it also includes a provision that would change the tax laws affecting second homes that are converted to primary residences. NAHB worked closely with members of the House Ways and Means Committee to minimize the negative impacts of this provision as much as possible – for example, we pushed for a "grandfather" clause that allows most existing second-home owners to live under the old rules.

In the end, NAHB Senior Officers and members of our Taxation Subcommittee and Federal Government Affairs Committee analyzed the legislation in depth, concluding that it was structured in such a way that the huge benefit on debt forgiveness and the extension for the deductibility of mortgage insurance outweighed the tax changes for second homes. See the Oct. 8 edition of NBN Online for details and specific examples of how the bill would affect second-home owners, or contact Rob Dietz (1-800-368-5242, x8285) or Greg Brown (x8421) for more information. To read the legislation, click here and type H.R. 3648 in the box in the center screen.

Bill to Modify Mortgage Bankruptcy Laws Clears House Panel

On a 5-4 party line vote, the House Judiciary Committee's Subcommittee on Commercial and Administrative Law approved legislation this week to allow bankruptcy courts to modify the terms of a home loan on a primary residence as part of Chapter 13 bankruptcy proceedings. H.R. 3609, the Emergency Home Ownership and Mortgage Equity Protection Act of 2007, would allow bankruptcy judges, among other things, to modify the terms of a mortgage loan or reduce the balance owed. While NAHB supports numerous legislative responses to the foreclosure crisis, including legislation recently passed by the House to modernize the FHA program (H.R. 1852), the scope of this bill reaches beyond the real problem, namely subprime adjustable rate mortgages, and could have a far-reaching impact on liquidity in the housing finance system. NAHB believes that H.R. 3609 would ultimately do more harm than good.

In a letter sent to subcommittee members prior to mark-up, NAHB said that by allowing bankruptcy judges to change the terms of a home loan after it has been signed, "H.R. 3609 would add substantial new risks to investors in the secondary market. This may reduce market liquidity and make it more difficult for borrowers to obtain a mortgage or refinance. As the risk is likely to be highest in the subprime and Alt-A market, this legislation will only further decrease the availability of credit to those borrowers the bill seeks to help."

The bill will next be considered by the full House Judiciary Committee. NAHB will continue to closely monitor events and express our concerns with lawmakers. To view the legislation, click here and enter H.R. 3609 in the box in the center screen. For more information, contact J.P. Delmore at 1-800-368-5242, x8412. [return to top]