Lawmakers' failure to extend the Mortgage Forgiveness Debt Relief Act by year-end will kill any momentum surrounding the short sales process, real estate economists say.
Several banking and real estate organizations sent a warning letter about the expiring act and the immediate need for an extension to Senate leaders Wednesday.
Short sales in the past year have become an attractive escape route for banks and borrowers when a homeowner simply cannot repay a home loan.
But if the mortgage debt relief act is allowed to expire on Dec. 31 without an extension, distressed borrowers could end up paying taxes on mortgage debts forgiven through principal reductions or short sales. The current law allows borrowers to avoid tax liabilities for the extinction or sale of mortgage debt.
"If Congress fails to act, the possibility of receiving a tax bill would make it more difficult and expensive for these struggling homeowners to accept short sales and many loan modification offers," the associations wrote in a letter to the Senate.
Doug Duncan, chief economist for Fannie Mae, said turning debt forgiveness from a nontaxable event to a taxable one could "encourage lenders to ramp up short sales in this (current) period."
He added, "Then after Dec. 31, it may create an incentive for the homeowner to simply let the process go to foreclosure because in a foreclosure proceeding it is not a taxable event," Duncan told HousingWire.
Organizations signing the letter included the American Bankers Association, the American Land Title Association, the Mortgage Bankers Association, the National Association of Home Builders and the National Association of Realtors.