(TheNicheReport) -- The era of Bush tax cuts may be coming to an end, and it may do away with short sales and mortgage modifications if Congress chooses to allow one particular tax cut to expire.
One of the first steps taken by the U.S. Congress to mitigate the avalanche of foreclosures and the collapse of the American housing market happened in 2007. The Mortgage Forgiveness Debt Relief Act of 2007 was prescient in the sense that it was passed before the fall of Bear Stearns and Lehman Brothers in 2008, the two biggest players in the field of mortgage-backed debt securities.
This law was signed by former President George W. Bush in September 2007 and was later extended to last until the end of 2012. One of the main provisions of the Mortgage Forgiveness Act is that it removes the tax liability of most homeowners when they complete a short sales or sign home loan modification agreement from their lenders. When banks reduce mortgage balances, either by means of short sale or modifications, the amount forgiven is normally counted as income to the borrower. The Mortgage Forgiveness Act absolves this tax obligation.
The Fight for Extension
Short sales have become a life ring for borrowers struggling with mortgage debt. Many economists and financial experts consider short sales and principal reductions of mortgage balances as two requisite strategies for the recovery of the housing market. Allowing the Mortgage Forgiveness Act to expire would cause undue tax burden on homeowners who have not been able to exit their homes through the short sale process, or who are still waiting on their banks to contact them with regard to a possible mortgage modification.
The ongoing debate over taxes in Congress is beginning to heat up, and industry officials from the National Association of Realtors and the Mortgage Bankers Association are worried that the extension of the Mortgage Forgiveness Act could evaporate. Several Bush-era tax cuts have come under serious scrutiny due to the mounting deficit they have created, and this is happening at a time when constituents are asking their legislators to do something about it.
Proposals for extension of the Mortgage Forgiveness Act have been introduced as early as March 2012. Some housing analysts forecast a run-up in short sales before Americans head to the polls in November, particularly since the current administration considers that it is time to allow some tax cuts to expire -although some Capitol Hill observers think that the Mortgage Forgiveness Act is likely to be extended.