Mortgage Debt Relief Act Might Get Extension

AUG 16, 2012 4:32pm ET
Comment (1)



The Senate Finance Committee approved a bipartisan bill before summer recess that would extend the Mortgage Forgiveness Debt Relief Act through 2013. The debt relief law spares homeowners who receive principal reductions on their mortgages from being hit with 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 by being taxed on the amount of debt that the lender forgave in the short sale or that was not recovered in the foreclosure sale. The law has provided relief to thousands of people who have debt balances written off as part of loan-modification agreements is set to expire at the end of December 2012.

The bill 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 continue some energy-efficiency tax credits for remodelings and new home construction.

The mortgage debt relief extension 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.

In 2007 the Mortgage Debt Relief Act 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, 2012. Without a formal extension by Congress, starting on Jan. 1 all mortgage balances written off by banks would be fully taxable.


There are five bills in Congress, so hopefully one of them will make it through for the homeowner.




On July 31, Donald Joe Barber of Pisson, Ala., was indicted by a federal grand jury for mailing a fictitious financial instrument to pay off his home mortgage.

A one-count indictment filed in U.S. District Court charges Barber with intent to defraud, alleging he used the mail on March 10, 2008, to move a fictitious instrument in a scheme to present it as a valid financial instrument issued under the authority of the United States.

If convicted, Barber could face a maximum sentence of 25 years in prison and a $250,000 fine. (usattyndal73112)


Use the mail with intent to defraud and if convicted risk 25 years in a federal person for mortgage fraud.  What is noteworthy is this is one loan, probably a relatively minor mortgage, and they chased him four years later to charge him with a federal felony. Remember, the federal government has 10 years to file charges from the date of the last event.




Federal prosecutors have filed fraud charges against five people in Alabama this month in connection with false statements made in mortgage loan applications.

On Aug. 6, 2012 prosecutors filed a one-count information in U.S. District Court against Gloria A. Allen, charging her with making a materially false statement on a 2008 loan application that was submitted to the Federal Housing Administration. Another information prosecutors filed charges Crystal S. Douglas with one count of making a materially false statement on a 2008 residential loan application to a financial institution insured by the Federal Deposit Insurance Corporation. Both Allen and Douglas, who were aided and abetted by others in the same loan scheme, signed loan applications that contained falsely inflated income information, according to court documents.

In two other informations filed in connection with a 2007 mortgage loan of more than $500,000, the U.S. Attorney’s Office charged Julie Melissa McBrayer with one count of mail fraud and charged Michael Joseph Bennett with one count of making false statements on loan documents.

At the time of the loan, McBrayer worked at Marathon Mortgage in Birmingham as a loan originator and was responsible for compiling the loan documents for the sale of Bennett’s property in Bessemer, according to McBrayer’s plea agreement with the government. In that agreement, McBrayer admits that she was directed to submit a false verification of employment form and a loan application that included false income information for the intended buyer of Bennett’s property in order to ensure the buyer would be approved for first and second mortgage loans on the house.

Bennett was a homebuilder. He is charged with signing loan documents that he knew contained false information. Those documents included a Department of Housing and Urban Development form that is intended to disclose the party making the down payment on the property being purchased. According to Bennett’s plea agreement in the case, he signed the HUD form stating that the borrower provided a down payment for his property when Bennett knew that someone else had provided the money.

The person who bought Bennett’s property made only a few payments on the first and second mortgages, which totaled $546,659, and the house was placed in foreclosure soon after the loans were approved, according to McBrayer’s plea agreement.

In another information prosecutors charged Danielle Lacey Chavers with two counts of wire fraud associated with applications for mortgage loans on two houses in 2008. Chavers submitted loan documents containing false income and employment information when she applied for mortgages on houses in the Birmingham area, according to her plea agreement. The fraudulent mortgage applications prompted approval of the loans, causing funds to be wired from the lender’s accounts to the trust account of the attorney handling the closings on the real estate transactions, according to the plea agreement.

Comments (1)
The portion about the possible extension of the the Debt Relief Act should be rewritten, as it contains serious errors. Even when the Act applies, relief is limited to "acquisition indebtedness". That means those whose loans were cash out refis may get little or no relief.

Next, even when there is protection from Cancellation of Debt Income [CODI], there can still be capital gain. This can often result if the state has applicable anti-deficiency protection.

Third, results can differ depending upon whether the loan is modified, short sold, foreclosed, or deeded in lieu. As always, the first inquiry is to the characterization of the debt under state law. Only then can the tax consequences be evaluated.

While the article does not purport to be a comprehensive review of tax consequences of various distressed loan alternatives, it should be limited to the possibility of extension. The few statements are not an accurate reflection of what the Act does.
Posted by | Sunday, August 19 2012 at 8:14PM ET
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