Find us on Google+

Suddenly, being financially irresponsible pays off!

October 11, 2007 · 0 comments

The House Ways and Means Committee has voted to permanently remove the income tax consequences for homeowners whose debt is partially forgiven by a lender after a foreclosure. The bill is likely to pass the House and Senate, and President Bush has already spoken publicly about his approval of the measure.

Great. Now homeowners have yet another incentive to spend beyond their means – as if interest only and subprime mortgages aren’t enough.

Don’t get me wrong. I don’t love the idea of adding insult to injury. And I don’t think adding an income tax consequence to someone already saddled with debt is a terribly effective way to get out of debt. And I realize how easy it is to become saddled with debt (I say this as a homeowner with tons of student debt, trying to educate and feed three children).

But this is the thing. I have people calling my office every week to tell me their stories. And a lot of times, it’s a combination of bad choices, bad luck and bad timing. And those people I can help.

But lately, I’ve been hearing more and more of the “I bought a house that I couldn’t afford at an interest only mortgage and help, now I’m in trouble!”

The answer? Take away the tax consequences. Whereas before, debt forgiveness was subject to taxation, the bill relieves all related consequences. You can read more from my colleague at Roth PC here.

The new “tax cut” means significant loss of revenue to the Treasury. To make up for the shortfall, the committee has approved restrictions on capital gains tax benefits available to second home owners who convert their vacation homes to primary residences. In other words, to paraphrase my colleague, Congress is offering a tax break to folks who can’t pay their debts by taking away a tax break for folks who can. Interesting concept, no?

Similar Posts:

{ 4 comments… read them below or add one }

1 Dan October 12, 2007 at 12:09 pm

Hi, Kelly:

I know, from writing about residential real estate, that mortgage loan officers were really pushing interest-only loans before the housing slowdown. Many of them told me they considered them the product of the future in the mortgage-lending business.

Personally, I couldn’t believe that so many people were taking out these loans. I know the rationale behind them, and they probably do work for some people who are actually saving the money that they’re not spending on their mortgage payments, but they seem like a terrible product for most buyers.

2 Tiffany October 17, 2007 at 12:59 am

Kelly, the bill doesn’t “relieve all related consequences”–the homeowner is still out of a home without anything to show for the years of payments made on the house, with a foreclosure and undoubtedly other black marks on his credit that will make it difficult to find another place to live at all.

Taxing as “income” money that was never received and exists only as the forgiveness of a debt that the debtor had virtually no hope of ever paying makes little sense, and often creates a situation in which debtors can’t even afford to have their debts forgiven–given the superior enforcement options of the IRS, many debtors are better off owing $100,000 that they will never be able to pay to the original mortgage lender than owing $15,000 to the IRS and losing what little resources they have to attempt to support themselves and get back on their feet.

3 Kelly October 17, 2007 at 8:08 am

The majority of these foreclosures are not long-time homeowners struggling to make homes meet. A disproportionate number of these foreclosures originated with loans taken out in the last two years for high dollar homes (most topping $500k) in inflated markets.

Also, to be clear, there was a benefit to the homeowner. Your home is not foreclosed upon after one missed mortgage payment. Depending on the state, it can take more than a year to make it to foreclosure – a year for which the homeowner has the benefit of living in a home for which he or she is not paying.

And there is “credit” for equity in some sense. The income is only imputed to the extent that there is more debt relieved than was paid.

It is rare in my policy arguments that I am arguing against the little guy. But I am tired of the government pitching in to bail out people who made poor choices. I know some of these homeowners. They are not folks like my parents who have worked for years to pay off a modest home. They are largely folks who jumped at unrealistic interest rates, who could not afford a traditional mortgage for a relatively expensive home and who jumped into a deal that seemed too good to be true without thinking about the consequences. Why should the lenders – or taxpayers – bear that burden?

4 Kelly October 17, 2007 at 8:08 am

The majority of these foreclosures are not long-time homeowners struggling to make homes meet. A disproportionate number of these foreclosures originated with loans taken out in the last two years for high dollar homes (most starting at over $500k) in inflated markets.

Also, to be clear, there was a benefit to the homeowner. Your home is not foreclosed upon after one missed mortgage payment. Depending on the state, it can take more than a year to make it to foreclosure – a year for which the homeowner has the benefit of living in a home for which he or she is not paying.

And there is “credit” for equity in some sense. The income is only imputed to the extent that there is more debt relieved than was paid.

It is rare in my policy arguments that I am arguing against the little guy. But I am tired of the government pitching in to bail out people who made poor choices. I know some of these homeowners. They are not folks like my parents who have worked for years to pay off a modest home. They are largely folks who jumped at unrealistic interest rates, who could not afford a traditional mortgage for a relatively expensive home and who jumped into a deal that seemed too good to be true without thinking about the consequences. Why should the lenders – or taxpayers – bear that burden?

Leave a Comment

{ 1 trackback }

Previous post:

Next post: