Mortgage Debt Relief Act one step closer to an extension

By Ken Go

SOME encouraging news for financially stressed homeowners across the country: The Senate Finance Committee approved a bipartisan bill before heading home for summer recess that would extend the Mortgage Forgiveness Debt Relief Act through 2013. Don’t jump yet, given the majority of Republicans in the House that might have serious objections, we will know in about a month, so cross your fingers.

What this is about: The law spares homeowners who receive principal reductions on their mortgages from being hit with hefty federal income taxes on the amounts forgiven. Without it, millions of owners who go through foreclosure or leave their homes following short sales would experience even more financial stress.

The bill, which now moves to the full Senate for possible action next month, also would extend tax write-offs for mortgage insurance premiums for 2012 and through 2013, and it would continue some energy-efficiency tax credits for re-modeling and new-home construction.

The mortgage debt relief extension ultimately could affect millions of families who are underwater on their loans, delinquent on their payments and heading for foreclosure, short sales or deeds-in-lieu-of-foreclosure settlements. Under the federal tax code, all types of forgiven debt are treated as ordinary income, subject to regular tax rates. When an underwater homeowner who owes $300,000 has $100,000 of that forgiven as part of a modification or other arrangement with the bank, the unpaid $100,000 balance would normally be taxable.

But in 2007, Congress saw the fast-mounting distress in the housing market on the horizon and agreed to temporarily exempt certain mortgage balances that are forgiven by lenders. The limit is $2 million in debt cancellation for married individuals filing jointly, $1 million for single filers. This special exemption, however, came with a time restriction. The current deadline is Dec. 31. Without a formal extension by Congress, starting on Jan. 1 all mortgage balances written off by banks would be fully taxable — a nightmare scenario that has had financially stressed homeowners worried for months.

Some Bad News for Homeowners who are Foreclosing or Short Selling their Condo’s without paying for the HOA dues.

The bad news is, the homeowner’s association will be able to pursue you personally for any money you owed it before the foreclosure sale was finalized—and the cost for not paying is steep. Under California’s Civil Code, if a regular or special assessment remains unpaid for more than 15 days after it’s due, the association is authorized to recover the sum due, plus interest, late charges and attorney’s fees. After 30 days, the association is allowed to charge an annual interest rate of up to 12% on everything it is owed, including all fees and expenses.

Thanks for your support and comments, please call Ken Go of 1st Innovative Finance Group at 562-697-7028 or write to