Mortgage Debt Forgiveness: Crisis Looms for Low-Income Homeowners
As the housing crisis began rearing its ugly head in 2007, Congress acted quickly and passed the Mortgage Debt Relief Act (MDRA). This Act provided temporary relief to homeowners facing foreclosure by excluding mortgage debt forgiveness amounts from being considered taxable income. Unfortunately, no one could have then predicted that this crisis in housing debt would extend up to, and undoubtedly beyond, the Act’s current sunset date of January 1, 2013.
If Congress doesn’t act by the end of this calendar year, the Act will expire. The consequences of this failure will be catastrophic, especially for low- and moderate-income homeowners. Among the biggest concerns:
- Taxable incomes will rise dramatically; many families will become ineligible for Volunteer Income Tax Assistance (VITA) – Unlike other forms of debt forgiveness, the amounts involved with mortgage debt often range as high as the tens of thousands of dollars. It’s easy to predict numerous scenarios where low- and moderate-income homeowners could see their taxable incomes double overnight, simply for trying to keep a roof over their heads. Under the maximum income limit for VITA – income no greater than $50,000 – families receiving write-downs or debt relief could easily be pushed out of eligibility in 2013. Suddenly, low- and moderate-income families would not only be responsible for huge tax bills; they’d be on the hook for hundreds of dollars in tax preparation fees for more complicated returns that they’d no longer be able to have completed at VITA sites for free.
- Larger taxable incomes mean more money owed to the taxman – Debt forgiveness itself is not a problem. What’s considered taxable is. A larger taxable income without any real increase in the earned income of low- and moderate-income homeowners means these families could suddenly owe hundreds to thousands of dollars more in taxes without the ability to pay for it. These tax increases would certainly also mean the loss or substantial depletion of support from the Earned Income Tax Credit and other refundable tax credits, for which households might lose eligibility. The bottom line: one debt will be forgiven while creating another.
- The National Mortgage Settlement could exacerbate the problem – The National Mortgage Settlement – a $25 billion settlement won by 49 state attorneys general against the largest banks – could create a huge dilemma for low- and moderate-income homeowners without the MDRA’s protection. The real concern is that many of these households may choose not to seek their deserved share of assistance from this settlement in fear of the huge tax burden they could face. Additionally, those who do opt-in to relief from the settlement could see the benefits of their choice wiped away when tax day arrives. Both scenarios would heavily damage the effectiveness of this much-needed settlement program.
Hope is not yet lost. Several Members of Congress have now filed bills to address this potential crisis before it occurs. Some simply seek a temporary extension of the MDRA for two years – S. 2250, introduced by Sen. Debbie Stabenow (D-MI) and H.R. 4202, introduced by Rep. Charles Rangel (D-NY). Others seek to not only extend the Act, but to ensure that any relief received under the National Mortgage Settlement is protected – H.R. 4290 (text not yet available), introduced by Rep. Jim McDermott (D-WA).
One thing is certain: The MDRA must be extended now. Families feeling the pressure of insurmountable mortgage debt can’t live in uncertainty, waiting to see if they’ll wrongly be thrust up into a higher tax bracket without earning a penny more and unable to pay their taxes. NCTC urges you to contact your Members of Congress today and ask them to guarantee that the Mortgage Debt Relief Act will be extended beyond 2012.
By Holden Weisman, Policy Analyst