The bill was in response to some of the tax issues that have arisen as a result of problems in the subprime mortgage market.
H.R. 3648 would provide tax relief to families by permanently excluding debt forgiven under these circumstances from tax liability. It would also help would-be homeowners secure their investments and avoid high interest, “piggy-back” loans for down payments through a long-term extension of the tax deduction for mortgage insurance while also easing restrictions for qualifying as housing cooperative corporations.
Under current law, when a family faces mortgage foreclosure, any debt forgiven or renegotiation is considered income for tax purposes, creating a large tax bill. Families dealing with the pain of foreclosure should not have the double burden of a large tax bill for terminating their mortgage through no fault of their own.
In declining real estate markets, it is not uncommon for the value of a home to be less than the homeowner’s outstanding obligations on their mortgage. If a bank forecloses on a home in this situation, homeowners can find themselves caught with the double cost of both losing their home, and facing a large tax bill. This can happen because under the current law, homeowners are taxed on debt that is forgiven by banks. Even taxpayers who restructure their mortgages to avert foreclosure face this risk of triggering large tax bills.
“Home ownership has always been a cornerstone of the American Dream and this legislation will help alleviate the pressure American families are feeling due to the subprime mortgage crisis,” said Rep. Raúl M. Grijalva. “It is wrong when struggling families are hit with a tax bill precisely at the time they can least afford it. This bill rights that wrong and provides tax relief to millions.”
It is estimated that two million American families could lose their homes to foreclosure due to rising interest rates in the current housing market crisis.