Statements on Introduced Bills and Joint Resolutions

Floor Speech

STATEMENT ON INTRODUCED BILLS AND JOINT RESOLUTIONS -- (Senate - May 15, 2007)

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By Ms. STABENOW (for herself, Mr. Voinovich, Mr. Kerry, Mr. Levin, and Ms. Snowe):

S. 1394. A bill to amend the Internal Revenue Code of 1986, to exclude from gross income of individual taxpayers discharges of indebtedness attributable to certain forgiven residential mortgage obligations; to the Committee on Finance.

Ms. STABENOW. Mr. President, under current law, only two categories of individuals pay tax on the sale of their principle residence: the truly fortunate who have realized a capital gain of more than $250,000, $500,000 on a joint return, or the truly unfortunate who lose equity in their home and are forced to pay tax if the lender forgives some portion of the mortgage debt. Surely this is an anomalous result.

Nevertheless, newspaper and television reports describe the burdens families all over the country are facing as lenders foreclose on borrowers who cannot make their mortgage payments. In more and more circumstances, these borrowers, often minorities and the elderly, are unable to make the escalating payments associated with subprime loans and some complex adjustable rate mortgage products.

Other media reports focus on the challenges sellers face if they live in areas with declining home values. There are instances where the value of housing in a whole market occasionally falls through no fault of the homeowner. A plant closes, environmental degradations are found nearby, a regional economic slump hits hard. This happened during the 1980s in the oil patch and in southern California and New England at the beginning of the 90s.

This is happening right now in Michigan with the depressed automotive industry. The Detroit metropolitan area had the highest percentage of households in foreclosure in the 150 largest metropolitan areas, with an average of more than 10,000 foreclosures in each quarter. The foreclosures affected 1 out of every 21 households, nearly five times the national average. Over the first quarter of 2007, Michigan had over 29,000 foreclosures and Detroit was on pace to record 11,000 for that same time period.

One thing these news reports do not mention is the tax problem that sellers or those in foreclosure will face if lenders forgive and do not require payment on some or all of a mortgage debt at the time of disposition. What happens to these people who must sell their homes during a downturn or who cannot make their payments and go into foreclosure? They must pay taxes on the amount forgiven; it is treated as income.

Below are two hypothetical scenarios where owners must have to pay taxes on the amount forgiven and those estimated taxes. The first example is a situation where there has been a downturn in the housing market. The second example is where a family, possibly because of loss of job, illness, or decrease in income or significant changes in the mortgage rate, can neither refinance the property nor sustain the payments and the lender forecloses on the property.

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In the ``short sale'' transaction, if the lender forgives the $10,000 of outstanding debt, the family will have taxable income of $10,000 on the transaction and owe $1,500, even though they have just sustained an economic loss and no cash gain.

In a second scenario, if the foreclosure sale does not cover the amount of outstanding debt on the property or $20,000, the lender might forgive remaining debt. Again, the borrower is treated as having received ``income'' when the debt is forgiven and in the example, would owe $3,000 in taxes on the $20,000 that was forgiven.

Clearly it is unfair to tax people on phantom income, particularly right at the time they have had a serious economic loss and have no cash with which to pay the tax. My bill, the Mortgage Relief Act, will relieve families of a tax burden when their lender forgives part of the mortgage on a principal residence.

None of us wants to learn that families in our own districts will be forced to pay taxes when they have no money and have incurred a substantial loss on what, for most, is the most significant asset they own, and possibly the only asset they have. While my legislation will not repair their credit or punish those who mislead them into inappropriate loans, it will prevent them from further financial harm.

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