If you’re at least 30 days behind on your mortgage, then your mortgage company is willing to consider completely forgiving a significant portion of your mortgage debt (provided you go through the proper process).  The portion they forgive, under H.R. 3648, is NO longer counted as personal income and CANNOT be taxed!

The Mortgage Debt Relief Act of 2007;  H.R. 3648:

• STOP FORECLOSURE!
• Save your home or sell your home without paying any realtor commissions or penalties to the mortgage company.
• Have a certified licensed agent work directly with your lender to work out the best solution for you.
• Stop the torment and stress from your mortgage company and other creditors.

The new exit strategy:  A short sale

by Dean Foust, Business Week

For all the homeowners who are upside down and can no longer make their mortgage payment (because of either a job loss, divorce, or an option ARM that’s resetting higher), up to now the only option was, well, letting the bank foreclose.  That’s not a good option since a foreclosure sticks on your credit record for at least 10 years.  But some experts are now advocating a “short sale.” This is a case of a distinction with a difference:  If your bank agrees to a short sale, you then hire an agent to find a buyer for the house, you sell the house for a loss, and with the bank’s blessing, they agree to eat the loss (although they could still demand the homeowner make some kind of payment or share the loss).

The experts say you’ll probably need to find a real estate agent willing to work for a smaller commission (which makes the bank a little more willing to absorb the loss), and you’ll also need to scale back your own spending.  Putting expensive jewelry on your credit card will make a bank less inclined to do you any favors on the sale of your home.

Of course, the better option is to find some way to stay in the house—by first, seeing if the lender is willing to restructure the loan, or forgo a couple of monthly payments to help you get back on your feet.  Apparently, more and more lenders are willing to make accommodations to avoid taking the property back.  Banks hate to take over homes, especially in a declining market, so you shouldn’t underestimate the willingness of a bank to make concessions.

Fact Sheet: The Mortgage Forgiveness Debt Relief Act

President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007, which will help Americans avoid foreclosure by protecting families from higher taxes when they refinance their home mortgages.  This Act will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive.  Under current law, if the value of your house declines, and your bank or lender forgives a portion of your mortgage, the tax code treats the amount forgiven as income that can be taxed.

This Act will increase the incentive for borrowers and lenders to work together to refinance loans and allow American families to secure lower mortgage payments without facing higher taxes.   

This Act Is A Good Step To Address The Housing Market, But Congress Has More Work To Do

Congress needs to complete work on responsible legislation modernizing the Federal Housing Administration (FHA).  This bill will give FHA the necessary flexibility to help hundreds of thousands of additional families qualify for prime-rate financing.

Congress needs to pass legislation permitting State and local governments to help troubled borrowers by issuing tax-exempt bonds for refinancing existing home loans.  Under current law, cities and States can issue tax-exempt bonds to finance new mortgages for first-time homebuyers.

Congress needs to pass legislation to reform Government Sponsored Enterprises (GSEs) like Freddie Mac and Fannie Mae.  GSEs provide liquidity to the mortgage market that benefits millions of homeowners, and it is vital that they operate safely and soundly. The President has called on Congress to pass legislation that strengthens independent regulation of the GSEs and ensures they focus on their important housing mission.

The Administration Has Moved Forward On Targeted Actions To Assist Homeowners That The President Announced In August

The President and his Administration have launched a new initiative at the Federal Housing Administration (FHA) called FHASecure.  FHASecure expands the FHA's ability to offer refinancing by giving it the flexibility to work with homeowners who have good credit histories but cannot afford their current payments.  By the end of 2008, the FHA expects this program to help more than 300,000 families refinance their homes.

Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson have assembled the private-sector HOPE NOW alliance.  HOPE NOW recently mailed hundreds of thousands of letters to borrowers falling behind on their payments and is supporting a toll-free mortgage counseling hotline, 1-888-995-HOPE.

HOPE NOW has developed a plan under which up to 1.2 million homeowners could be eligible for assistance.  The HOPE NOW plan will help subprime borrowers who can afford the current, starter rate on a subprime loan, but would not be able to make the higher payments once the interest rate goes up.

IMPORTANT TO NOTE:

Although the Mortgage Debt Relief Act will save some homeowners facing short-sales or foreclosures from paying federal taxes on the “forgiven” debt.  There are very specific requirements:

• The mortgage is for the homeowners principal residence.  The relief does not apply to any debt forgiveness for any vacation or investment home.

• Forgiveness is only for the “acquisition indebtedness” of the principal residence.  Acquisition Indebtedness is defined as the debt used to acquire, construct or rehabilitate the home.

• No relief is available for cash-out mortgages whether the cash-out takes the form of a refinanced first mortgage, a second mortgage, a home equity line of credit or a similar arrangement.  Exception:  If the cash-out was specifically used to improve the home and the homeowner has adequate records to prove it.

This bill relieves these specific homeowner of their federal tax liability but does NOT relieve the homeowner of their state income tax liability.