Congress Called Upon to Extend Mortgage Forgiveness Debt Relief Act

The Financial Services Roundtable (FSR) and several other financial trade associations sent a joint letter to congressional leadership today calling for lawmakers to grant a two-year extension of the Mortgage Forgiveness Debt Relief Act, which prevents distressed homeowners from facing exorbitant income tax bills on the forgiven portion of their home loans.

“Because the tax relief from mortgage debt forgiveness has been allowed to expire, the federal government is now spending money on programs to prevent foreclosures while threatening to tax the very homeowners they are trying to help,” said the letter. “Many Americans now fear a tax bill they cannot afford, while others are choosing to simply go into foreclosure and declare insolvency.”

For example, a homeowner currently in the 25 percentile tax bracket who has $100,000 forgiven by their lender would be taxed $25,000, even though the forgiven portion of the loan is considered “phantom income”, or money that was never actually received by the homeowner.

Along with the two-year extension, the trades are requesting that the extension be applied retroactively to loans forgiven after the law expired in December 2013. Despite some gains in the nation’s economic recovery, nearly two million Americans are still either seriously delinquent on their mortgage payments or are in the foreclosure process, and 11 percent of all homeowners own homes that are worth less than the outstanding mortgage balance.