Opinion: We Need Extension Of Mortgage-Forgiveness Measure

Estimates are that 7.4 million Americans are still in the position of owning a home with a value worth less than their loan balance.

The Record ( — Tuesday, August 25, 2015

The Record

LORETTA Hill deserves congressional help. Last month The Record ran an article about Hill, a state health care worker living in Passaic, who fell behind on her mortgage payments after being out of work on limited disability income following a job-related injury. Because she is raising five nieces and nephews, the prospect of losing her home was daunting, and her options were limited by the fact that her home's current value is about half of what it was when she purchased it. Working with a New Jersey Citizen Action loan counselor, Hill was able to negotiate a mortgage principal reduction from Ocwen Financial that would enable her to stay in her home, continue raising her family and help preserve her neighborhood.

But federal tax policy threatens this common-sense, beneficial solution to foreclosure.

In 2007, Congress decided that under the current law, the portion of a mortgage loan forgiven as part of a loan modification agreement was taxable as income to the homeowner. This created a huge disincentive for completing loan modifications that included principal write-downs or pre-foreclosure options such as a short sale. In order to encourage lenders, servicers and borrowers to complete loan modifications that help stabilize neighborhoods and, by extension, improve the housing sector, Congress approved the Mortgage Forgiveness Tax Relief Act. This new law temporarily eliminated the tax on debt forgiveness related to a qualified principal residence. The act has been extended twice since then but will expire at the end of 2015.


Organizations like New Jersey Citizen Action have been diligently working on solutions to keep people in their homes and stabilize and preserve neighborhoods. Ocwen's creative Shared Appreciation Mortgage program is one of the most useful tools in our tool chest. Sen. Bob Menendez's Preserving American Homeownership Act will bring further relief when it is passed. However, in order to finish the job and make sure that certain borrowers aren't unfairly burdened, Congress needs to act soon to extend the Mortgage Forgiveness Tax Relief Act.

Estimates are that 7.4 million Americans are still in the position of owning a home with a value worth less than their loan balance, borrowers who are still "underwater" on their loans, particularly in hard-hit areas such as New Jersey. These homeowners deserve opportunities for loan restructuring without being punished by the tax code.

The unresolved problem in New Jersey is acute, as Newark, Elizabeth and Paterson all rank in the top five cities nationally for the percentage of mortgages underwater. There is a distinct concentration at the lower end of the home price curve affecting first-time and lower-income homeowners. Economists at Deutsche Bank found that lower-end homes are three times more likely to be underwater than higher-priced homes.

Thanks to a creative loan modification involving a significant reduction in principal from Ocwen, Loretta Hill will be able to stay in her home. Under the agreement, her mortgage is being reduced by almost $185,000 and her interest rate will be reduced from 8.8 percent to 3.4 percent. In return, Hill will return to the investor 25 percent of any future appreciation of her home when she decides to sell or refinance. Ocwen has similarly modified more than 2,700 mortgages for New Jersey homeowners since 2011.

While Hill has said that this solution eases her fears of being homeless, without congressional action she faces another devastating possibility: a potential tax bill in the tens of thousands of dollars.

Congressional help

Hill and millions of Americans like her did not cause the mortgage crisis. She works hard, loves her family and is striving to provide stability in her community. She does not deserve to be treated differently simply because of the timing of her loan modification. She does deserve congressional help to move beyond this painful chapter, as do many more like her.

NJCA urges Rep. Scott Garrett, R-Wantage, a ranking member of the House Financial Services Committee, to step up to the plate and take the lead on getting the Mortgage Forgiveness Tax Relief Act passed immediately. Too much is riding on this for New Jersey's underwater homeowners.

Phyllis Salowe-Kaye is executive director of New Jersey Citizen Action.

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