Forgiveness Debt Relief Act of 2007, which was set to expire December 31, 2012,
has survived and has been extended to January 1, 2014. This is good news for our newly recovering
housing market. Although the Senate
missed its deadline of midnight December 31, they decided to enjoy the holiday
and reconvened on January 1 in the evening. Along with the largest tax increase our
country has ever seen, was the expiration of debt relief.
law, the forgiven debt would be treated as taxable income and the homeowner
would be hit with a tax bill. To use an
example from the Wall Street Journal, Market Watch, a homeowner in the 25% tax bracket
that is underwater on their mortgage: they owe $200,000 and short sell for
$150,000, leaving $50,000 of forgiven debt.
The homeowner would owe $12,500 in taxes.
Point Research and Trading says, "The
amount extends up to $2 million of debt forgiven on the homeowner's principal
residence," meaning; "For homeowner's to qualify, their debt must
have been used to 'buy, build, or substantially improve' their principal
residence and be secured by that residence. The law, which was passed in 2007
with a 5-year sunset provision, will now be in effect until Jan. 1, 2014."
this law to expire would have forced many underwater (negative equity)
homeowners into foreclosure. Why would a
homeowner agree to short sale if they will be taxed on it? The same goes for a loan modification or
principle reduction, which has proven to be more successful than most
principal balance reduction is $150,000, and more than 13,000 were executed in November alone. Short
sales in the third quarter alone were over 98,000. You can see how this is vital to reducing the
shadow inventory. Right now, the shadow
inventory is 2.3 million, which is a 12% reduction from 2011. More short sales result in destabilizing
prices if not priced accurately, but short sales reduce the number of
foreclosures. Reducing foreclosures
allows investors to continue chipping away at the shadow inventory. Reducing
the shadow inventory allows new buyers to focus on existing inventory of pre-owned
and new construction instead of hoping for a distressed deal. Realigning buyers’ focus allows lenders to be
more aggressive in their lending options based on historical housing
performance not fueled by artificial stimulus.
In a market
where new progress and new construction has been jumpstarted, a surge of
foreclosures would potentially, AGAIN bring the market to an abrupt halt. For states like Illinois, where there are
many properties still flooding the distressed and foreclosed markets due to the
judicial process, the already backlogged court system, would simply be further