WASHINGTON (AP) -- Financial relief for homeowners facing foreclosure or in bankruptcy advanced in the House Thursday when the House approved legislation to help financially strapped homeowners.
The bill, passed by a 386-to-27 vote, would give a tax break to homeowners who have mortgage debt forgiven as part of a foreclosure or renegotiation of a loan. No taxes would be owed on the value of any debt forgiven or written off. Currently such debt forgiveness is taxable income.
While the measure is anticipated to reduce taxes of some strapped homeowners by $650 million, the cost to the government would be offset in part by limiting a tax break available on the sale of second homes.
The House vote was the latest congressional reaction to a mortgage crisis touched off this spring by a blowup in high-priced home loans for risky borrowers, throwing a pall over the economy. Foreclosures are at record highs and late payments are spiking. Lenders have been forced out of business and investors have taken huge financial hits.
An estimated 2 million to 2.5 million adjustable-rate mortgages - worth some $600 billion - will jump from low initial "teaser" rates to higher rates this year and next. Steep prepayment penalties have made it difficult for some to get out of their mortgages, and some overstretched homeowners can't afford to refinance or sell their homes.
To help offset the $650 million in tax revenue, the legislation makes it harder to get breaks on capital gains taxes for the sale of second homes. The White House supports the measure but wants mortgage relief to be in effect three years, not permanent as approved in the House. Bush also is opposed to limiting tax breaks on the sale of second homes.
The Mortgage Bankers Association expressed strong support for the bipartisan tax-relief bill but fiercely criticized another measure, opposed by Republicans on a House Judiciary subcommittee that narrowly approved passing it to the full committee.
That measure, which faces a contentious future in Congress, would revise the bankruptcy code to aid homeowners facing default and foreclosure. If enacted, it would further trim profits at hard-hit mortgage lenders.
The bill would allow judges to order mortgage lenders to ease terms for homeowners in bankruptcy proceedings. Currently, mortgage lenders can foreclose against a homeowner in default 90 days after a bankruptcy filing.
Mortgage lenders would be "terrified" of getting wrapped up in bankruptcy proceedings, said Brian Gardner, a research analyst with investment firm Keefe, Bruyette & Woods.
The MBA said in a statement: "Lenders will have no choice but to move to foreclosure right away to ensure that they are not covered by the onerous provisions of this bill. In the longer term, investors and speculators who overpaid for homes at the height of the housing bubble will have an incentive to file for bankruptcy, walk away from the loan and property, and reap an undeserved windfall."
The tax-relief bill is H.R. 3648.
The bankruptcy-related bill is H.R. 3609.
In response to the MBA, so the MBA should reap a windfall for engaging in what they knew -- or, at least, should have known -- was an overheated market (that they helped create)? Secondly, if you are in bankruptcy, where is the "windfall?" After all, isn't that a risk that lenders take when they make loans?