Ben Dash was interviewed by Star Ledger reporter Tom De Poto for an article appearing on January 6, 2013 pertaining to the one-year extension of the Mortgage Forgiveness Debt Relief Act.
January 06, 2013
When Congress voted Tuesday to save the country from plunging off the so-called fiscal cliff, it also extended a tax break for struggling homeowners that will help the housing market, especially in New Jersey, according to several analysts.
President George W. Bush signed the Mortgage Forgiveness Debt Relief Act into law in 2007 to help homeowners whose debt exceeded the market value of their house. Prior to that, having a portion of a mortgage forgiven was considered taxable income.
The tax break was scheduled to expire in the new year, but has been extended through 2013. The Congressional Budget Office estimates it may cost the federal government $1.3 billion in lost revenue.
Despite the potential loss to the Treasury, “It was an intelligent decision the first time and it was intelligent to do it again,” said Keith Gumbinger, vice president of the Pompton Plains-based mortgage research firm HSH.com
The break has benefited homeowners looking for loan modifications or short sales. Without it, a borrower who owed $300,000 on his mortgage, for example, and sold his house for $250,000 would pay taxes on the $50,000 that the bank forgave. Someone in the 25 percent tax bracket earning $37,000 a year could pay $12,500 in additional taxes on the forgiven loan.
Last year, nearly 13 percent of homeowners in New Jersey were considered “seriously delinquent” on mortgage payments, according to Mortgage Bankers Association.
Gumbinger said not extending the law would have had a ripple effect.
“Short sales would come to a close, or at least slow down to the levels of a couple of years ago,” he said. “That would result in lower home prices because there would be a greater inventory of distressed properties.”
Short sales are intended to keep homeowners having trouble with mortgage payments from ruining their financial ratings.
“This law kept a lot of people from going through a foreclosure,” said Benjamin Dash, of the Moorestown-based law firm Dash Farrow, “or filing a bankruptcy, which could bring about far worse consequences.”
Banks also benefited, he said.
“For lenders, this is a sigh of relief, too,” Dash said. “In New Jersey, we have a significant backlog of foreclosure filings, and we average three years to prosecute. That involves significant time and costs that many lenders want to avoid.”
Homes that were not in pre-foreclosure but sold for less than the amount owed on the mortgage made up an estimated 22 percent of all New Jersey residential sales last year, according to Daren Blomquist, vice president of RealtyTrac. That figure is up 46 percent from 2011.
“The sharp increase … demonstrates that both banks and homeowners were more motivated to complete short sales,” Blomquist said.
Banks took advantage of them because “of the increasingly messy and lengthy foreclosure process,” according to Blomquist. And homeowners were eager because, if the tax break ended, the forgiven debt would be a “taxable event,” he said.
Bank of America helped 164,000 homeowners with $15.8 billion in reduced principals, forgiven loans and reduced percentage rates last year. JPMorgan Chase offered $7 billion in assistance to 75,000 struggling homeowners.
Those two banks, along with Wells Fargo, Citigroup and Ally Financial, entered into an agreement with 49 states and the federal government to help homeowners struggling with their mortgages to the tune of $25 billion in response to the robo-signing scandal in 2010.
“We’ve seen over the past three years a spike in short sales,” said Dash, the attorney. “We anticipate it will go up over the next couple of years. Extending the act was a huge, huge relief.”
Tom De Poto: 973-392-4270, or firstname.lastname@example.org