Bush Foreclosure Solution Just Adds Water

It wasn’t very long ago that President George W. Bush came out with a public policy statement negating any possibility of either a homeowner, or a lender bailout, given the impact the current mortgage crisis is having on the nation’s housing economy.

So it comes as a surprise of sorts that the White House issued a statement earlier this week supporting the recent passage of HR 3648 by the House of Representatives, while at the same time asking that a key provision of the bill be watered down to the point of making its implementation temporary at best.

Titled the “Mortgage Forgiveness Debt Relief Act of 2007,” HR 3648 is sponsored by Rep. Charles Rangel (D-NY), Chairman of the House Ways and Means Committee, and a number of other sponsors. The provision that is the focus of the White House proposal goes to the crux of the bill – to amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income.

At present, under the Tax Code a homeowner who loses a home to foreclosure has to pay income taxes on any portion of the mortgage debt the lender may decide to forgive. The IRS currently considers such forgiven debt to be additional gross (and taxable) income for the year.

This can directly affect the homeowners’ ability, or desire for that matter, to proceed with such things as short sales and other types of workout situations that may offer them foreclosure relief, for instance.

“…the Administration strongly believes this relief should be temporary to assist  homeowners during the current mortgage market transition period and to avoid distorting consumer and lender decisions on new mortgage loans,” the statement said.

The White House also goes on to justify its position, stating that the Tax Code, as it currently exists, already provides relief to the most financially-distressed mortgage borrowers from having to pay tax when a debt has been discharged in bankruptcy.

Given such reasoning, amending the legislation’s core concept may indeed be justified because in the free market system under which this country operates homeowners, like any other consumers, should not be rewarded for making bad financial decisions in purchasing more home than they could really afford in the first place.

Still, the Administration’s view that this assistance be temporary, and should last only so long as it takes for the mortgage markets to emerge from the current “transition period,” may be flawed from the get go. Most people facing foreclosure at any time, no matter the cause, probably don’t have either the income or the equity to pay the higher taxes on the forgiven debt to begin with. And the timing and true length of a market turnaround in the current circumstance, when it occurs, is uncertain at best.

Will this effect the number of foreclosures coming down the pike as non-traditional ARM’s continue to reset at higher interest rates for the next few years? Probably not in the near term at least, since most major lenders are still holding out from agreeing to workout deals and short sales.

However, many industry experts believe that lenders will eventually have to come around to accepting the idea, even if begrudgingly, as their REO inventories continue to expand at a more rapid pace as those subprime loans reset their rates.

Stay tuned to ForeclosurePulse and RealtyTrac as this story continues to develop.