The U.S. Senate has introduced two bipartisan pieces of legislation that, if approved, will offer much needed relief to underwater homeowners, rejuvenate the Home Affordable Modification Program (HAMP), create and preserve jobs, and spur economic growth. The identical bills, currently before the Senate Finance Committee, would extend the Mortgage Forgiveness Debt Relief Act through 2016. The legislation provides relief for distressed homeowners by eliminating the tax on debt forgiven during distressed real estate transactions.
The Inspector General of the Troubled Asset Relief Program issued a sobering report on the performance of HAMP, stating that since its inception in 2009, nearly one-third of all homeowners who received a loan modification through the program have redefaulted. The redefault rate for homeowners who received loan modifications in 2009 surged to 53% in 2014, up from 46% in 2013 according to the report, raising concerns that more redefaults could follow. While fair and legitimate debate is currently underway about HAMP’s performance, there is no question that there is a necessity to boost its utilization, and furthermore it is in no one’s interest if HAMP continues to underperform.
For the nearly one-third of program participants, passage of the Senate legislation could mean immediate relief in the form of short sale transactions. Short sales allow the borrower and the lender to walk away from a transaction that has failed for both parties with far less damage than foreclosure or defaulted loan modifications. Unfortunately, short sale transactions declined dramatically in 2014 because Congress did not pass this crucial tax extension until December. Without the tax break extension in place, underwater homeowners and potential short sale buyers are reticent to execute the transaction because of the potential negative tax consequences.
While a short sale may not be optimal for every underwater homeowner, the transaction will provide relief for homeowners redefaulting under HAMP. Maximizing short sale usage will provide a sensible solution for many distressed homeowners by unshackling them from a property they cannot afford. The benefits of short sales expand far beyond helping underwater borrowers. Since many distressed properties are in some form of disrepair, or sometimes abandoned altogether, short sale usage will result in safe affordable housing for qualified buyers and safer communities by reducing the number of abandoned properties which often draw criminal activity. The contractors needed to provide the repairs for these homes means job creation and job preservation in communities desperate for economic stimulus.
In addition to safer communities, short sales will generate more real estate tax revenue, bolster local businesses by empowering formerly distressed homeowners with more disposable income and introduce qualified owners with disposable income to communities, and dramatically reduce the threat of the formation of foreclosure clusters that have decimated so many communities around the country. Short sales are a proven commodity for assisting underwater borrowers, and the Senate Finance Committee legislation will ensure those borrowers have access to this crucial transaction.
For underwater homeowners who can afford refinancing, an effective HAMP is an essential resource. But the program, which should be saved, clearly needs assistance. A multi-year extension of the Mortgage Forgiveness Debt Relief Act would serve as an important tool for improving the program. Similar to its impact on short sales, the extension would provide certainty against the threat of tax penalties against those least able to absorb the burden.
The consequences of HAMP’s failure would fall largely on underwater borrowers, but would also be felt throughout the broader economy. HAMP’s current performance results in depressed local and state tax revenues when distressed homeowners fail to pay real estate tax. In addition, the lack of disposable income of underwater homeowners hurts local economies, and a new wave of foreclosures is sure to create blight and decrease home values throughout distressed communities.
Hopefully, members of the House and Senate from both sides of the aisle will join with the Senate Finance Committee and extend the Mortgage Forgiveness Debt Relief Act through 2016 as soon as possible. Time is of the essence for this issue because homeowners and buyers cannot exercise the short sale option until the tax extension is in place, and the underutilized HAMP must improve its performance for the sake of underwater borrowers. This legislation is a tangible and philosophical win for both parties that will stimulate the economy, provide much needed help to distressed homeowners, boost job creation and preservation, and breathe new life into a struggling federal housing program.