The Mortgage Forgiveness Debt Relief Act in the US will expire in 10 months and this could affect many borrowers, as there are early indications in the US congress that the law may not be renewed.
The law allows homeowners who have acquired principal reductions on their mortgages as a result of short sales, foreclosures or loan modifications to avoid income taxation on the debts forgiven.
The end of the debt relief act could endanger many distressed mortgage arrangements in the coming months. For example, the US$25 billion (S$31.44 billion) home loan settlement with 50 state attorneys general mandates banks to offer over US$10 billion (S$12.58 billion) in principal reductions to borrowers.
In addition, other mortgage servicers and lenders who are not covered in the settlement already offer principal reductions to distressed borrowers. Many of these borrowers could face a hefty and ill-timed taxable income if the law is not extended.
Election-year politics and a contentious lame-duck session in congress could spell doom for the law’s renewal. Republican strategists stated that the cost of continuing the programme, which stands at US$2.7 billion (S$3.4 billion) for two years, will catch the eyes of budget-deficit hawks.
Moreover, some members of congress may oppose the law, seeing it as another targeted federal benefit for individuals who did not pay their mortgages.
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