COLUMN: Responding to the Subprime Mortgage Crisis

Statement

COLUMN: Responding to the Subprime Mortgage Crisis

As most Mainers know all too well, our nation is currently facing a homeowner mortgage crisis largely driven by rising rates for subprime mortgages, many of which were sold unscrupulously.

The number of homeowners receiving foreclosure notices hit a record high in the spring for the third quarter in a row. Even beyond those who have faced foreclosure, hundreds of thousands of American families now face serious worries about losing their homes as their mortgage payments increase due to subprime loans with adjustable interest rates.

According to recent estimates, some 2 million Americans will see their mortgage payments jump over the next two years because of an increase in adjustable-rate mortgages. This is a serious issue for homeowners and for working families — one that needs to be addressed. We need to do what we can to strengthen the housing market and stabilize the economy.

Efforts are underway in Congress to assist these struggling families. One step we can take is to help many of these families to refinance their mortgages so that they can make affordable payments and keep their homes. Experts estimate that up to 40 percent of families with subprime loans could qualify for more affordable fixed rate loans, which make payments far more manageable.

To help these families make that transition, the House of Representatives passed a bill last month called the Expanding American Homeownership Act of 2007 (H.R. 1852). The bill would provide refinancing of mortgage loans through the Federal Housing Administration for families who have defaulted on their existing loans because of interest rate resets and other factors related to the growing mortgage crisis — giving a way for families to weather the storm and get back on a path of being able to pay their mortgages. This bill would also make rules changes within the Federal Housing Administration programs meant to draw more borrowers in, and away from predatory lenders or more risky loans.

Beyond refinancing, the federal government can also help struggling homeowners with subprime mortgages to improve their financial footing by decreasing their other financial obligations. One helpful step was included in a bill that the House of Representatives just passed called the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648).

This bill addresses a little known provision of the current tax code that is increasing the financial hardships for those who have lost their home. Under current law, the debt forgiven following mortgage foreclosure or renegotiation is considered income for tax purposes. In other words, if a family has its house foreclosed and they are therefore no longer liable for some of their debt, they are taxed on that decreased debt as if it was money coming into their pocket.

The idea that homeowners find themselves facing a large tax bill at the same time they are losing their homes for income they didn't earn is wrong. The bill we passed ends this tax on phantom income.

To prevent any abuse, the bill caps at $2 million the maximum amount of forgiven debt that would be eligible for tax relief, and it limits tax relief to situations where the debt is forgiven because of a decrease in home value or because of the financial hardship on the borrower. In other words, this reform can't be used to bail out people buying second homes or vacation homes as an investment — it is limited to people who have been caught in the current subprime climate and are truly losing their home.

The bill also extends the tax deduction for private mortgage insurance, which insures the homeowner against default on their mortgage.

Unfortunately, many experts are predicting that the subprime mortgage crisis is far from over, but the steps taken in these bills in the House can provide a route for Americans to keep their payments affordable, lower their bills, and keep their homes. The Congress will continue to work quickly in the coming months on new ways to help homeowners get through this difficult time.

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