Expiring Mortgage Debt Relief Act Fuels Strategic Default: Survey
By: Esther Cho 05/29/2012
A foreclosure prevention agency found that the pending expiration of the Mortgage Debt Relief Act of 2007 is prompting struggling homeowners to strategically default on their loan.
YouWalkAway.com conducted a national survey and found 34 percent of respondents indicated that the act, which is set to expire December 31, 2012, contributed to their decision to walk away sooner rather than later from their property. Those surveyed were YouWalkAway.com clients who were actively considering or navigating through the foreclosure process.
The Mortgage Debt Relief Act releases homeowners from the obligation of paying taxes on mortgage debt forgiven from a short sale, foreclosure, or modification. Taxpayers are eligible if the property is the primary residence.
“The survey results are not surprising; YouWalkAway.com saw a number of homeowners reach out to us in early and mid-2011 due to the impending 2012 deadline,” said Jon Maddux, CEO of YouWalkAway.com, in a release. “Many were prompted to begin the foreclosure process in 2011 in order to ensure their foreclosure is complete by the end of 2012.”
While the expiring act motivates homeowners to seek completion of the foreclosure process before the expiration date, for those who won’t qualify in time, Maddux said not extending the act will then cause short sales to stop immediately due to the fear of getting hit with a huge tax bill.
In addition, 78 percent of respondents from the YouWalkAway.com survey expressed intentions of walking away from their home. Of those, at least 74 percent would qualify for relief under the act.
“Potentially millions of people will find themselves stuck with a huge tax bill after foreclosure if the government doesn’t renew the Debt Relief Act at the end of 2012 or if they don’t finalize their foreclosure by that date. The bill may just expire, like when Congress chose not to renew the home buyer’s tax credit,” said Maddux.
Cheryl Gerhardt, a CPA who has worked with YouWalkAway.com clients, said about 80 percent of the people who approach her about foreclosure tax consequences qualify for the relief under the act.
“These are usually people who purchased during the height of the market from 2005 to 2007 and never had the opportunity to take out a second, whereas a few years ago clients who were getting foreclosed upon had made purchases in the early 2000’s, took out a home equity line of credit and could not qualify,” said Gerhardt.
In March, House Bill H.R. 4290, or Homeowner Tax Fairness Act, was introduced to extend the act to 2015. The bill is sponsored by Rep. James McDermott.
The Mortgage Relief Act was actually extended in October 2009, three months before the act’s expiration date.
YouWalkAway.com works with borrowers facing foreclosure as well as those opting to strategically default on their underwater homes. The survey the agency conducted reached out to 2108 borrowers and received responses from over 25 percent of those contacted.