Congress Acts on Flurry of Mortgage Issues

In a flurry of legislative activity, Congress completed action on a mortgage debt tax relief bill and an extension of the federal government's terrorism insurance program before adjourning for last year.

Passage of the mortgage tax relief bill (H.R. 3648) is expected to encourage loan modifications and help distressed homeowners avoid foreclosure.

The bill ensures homeowners are not penalized when a lender reduces the principal amount of their mortgage in a restructuring or foreclosure.

Currently, any reduction in mortgage debt by a lender is treated as income for tax purposes.

President George Bush signed the tax relief bill on Dec. 21.

And administration officials are hoping the big writedowns banks are taking on subprime mortgages will finally trickle down to homeowners who need debt forgiveness to refinance their mortgages or reduce their monthly payments to an affordable level.

The tax relief is retroactive and temporary, as requested by the Bush administration, and it applies to a discharge of debt on a principal residence from Jan. 1, 2007 until Jan. 1, 2010.

However, many distressed borrowers may not qualify for this relief under the plan.

Distressed homeowners who used the equity in their homes to finance debt consolidation or vacations will still face a tax penalty.

Only mortgage debt used to finance the acquisition of a borrower's primary residence and improvements to the property will escape being treated as ordinary income for tax purposes, according to a mortgage banking alert by two tax attorneys at K&L Gates.

Attorneys Kenneth Wear and Roger Wise also point out that only borrowers who have lived in their homes for at least two years can qualify for tax relief. This provision weeds out speculators but it also denies relief for new homeowners who got in over their heads and defaulted early.

The tax bill also provides for a three-year extension of a deduction for mortgage insurance premiums. Continuing this tax deduction is an "important step forward as Congress seeks solutions to the current housing and mortgage crisis," said Kevin Schneider, president of Genworth Financial Inc.

"Many potential buyers can't make a traditional 20% downpayment, and a loan with tax-deductible mortgage insurance may make the difference in their ability to become homeowners safely," he said. Mr. Schneider is president of the Mortgage Insurance Cos. of America.

Only low- and moderate-income homeowners can take the deduction, which averages $350 per year.

To the relief of commercial real estate interests, Congress completed action on a seven-year extension of the Terrorism Risk Insurance Act, which was due to expire Jan. 1. President Bush signed the bill last week.

The House originally passed a 15-year extension of the federal government's terrorism insurance program that would have expanded federal backing to cover insurance for nuclear, biological, chemical and radiological acts of terrorism.

The Senate went with a simple seven-year extension with the blessing of the Bush administration, which caused a lot of friction on the House side. But House members reluctantly agreed to a compromise that allows for terrorism insurance to cover domestic acts of terrorism for the first time. "I am disappointed that the final TRIA bill omitted key elements of our stronger House legislation, but this is a solid compromise measure that will stabilize the market and ensure the ongoing availability of affordable terrorism insurance," said Rep. Carolyn Maloney, D-N.Y.

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