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A Gift from Desperate Legislators to Irresponsible Borrowers

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December 19, 2007 – Comments (5) | RELATED TICKERS: CFC , C , MS

Hey folks, you can all write bigger checks to the tax-man in coming years in order to fund the tax break just handed to irresponsible borrowers by our deperate-for-votes legislators.

Here's some of what happened yesterday in congress:

Mortgage Forgiveness Debt Relief Act of 2007: Agreed to the Senate amendment to H.R. 3648, to amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income--clearing the measure for the President;

What does that mean? It means if you borrowed a big pile of money from the bank, and you can't afford to pay it back, and the bank, rather than foreclose on you, forgives some of that debt -- it's no longer treated as income. This also goes for refinancing.

Let's get this straight. You borrow money for a big, fancy house you can't afford. Someone turns around and says "no, you just keep this chunk that evaporated because you paid too much, no need to pay me back..." and that's not "income."

You take $30k from the bank in "equity" to spend on junk, and the bank turns around and hands that to you, free and clear, somehow that's not "income."

It looks like it applies not only to owner occupied whole-home mortgage givebacks, but to flipper properties, big kitchen remodels, and land purchases:

 `(2) QUALIFIED RESIDENTIAL INDEBTEDNESS-

  `(A) IN GENERAL- The term `qualified residential indebtedness' means indebtedness which--

   `(i) was incurred or assumed by the taxpayer in connection with real property used as a residence and is secured by such real property,

   `(ii) is incurred or assumed to acquire, construct, reconstruct, or substantially improve such real property, and

   `(iii) with respect to which such taxpayer makes an election to have this paragraph apply.

  `(B) REFINANCED INDEBTEDNESS- Such term shall include indebtedness resulting from the refinancing of indebtedness under subparagraph (A)(ii), but only to the extent the refinanced indebtedness does not exceed the amount of the indebtedness being refinanced.

Your proof that this is a bad idea is that the National Association of Gimme My Six Percent is releasing PR about how this is a peachy measure designed to protect "the American dream."

Of course, maybe we won't have to pay for this at all. Maybe it's free. I didn't see a CBO estimate on what this would cost attached to either bill, so it's probably best to assume it costs nothing.

5 Comments – Post Your Own

#1) On December 19, 2007 at 6:30 PM, rbenesh (96.59) wrote:

No one is really surprised by this, are they?? Home ownership is the one Sacred Cow of the tax code.

 As to it costing nothing, I'm guessing that's pretty close to the amount of taxes that would have been collected from the defaulters.

                                                              Rich
 

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#2) On December 19, 2007 at 7:29 PM, Imperial1964 (97.86) wrote:

I think the idea is that when a certain portion of debt backed by property is forgiven, that "income" is probably offset by a similar loss in the value of the asset.  And it's not like they're doing any favors to the banks or homeowners by taxing someone thousands of dollars when they already can't pay their debts.

I think I'll agree with them that it should not be taxed, but only if it is a primary residence.  Instead, I think that mortgage interest should not be tax deductable.  Many other countries do not have deductions for debt and consequently, their citizens are less levered.  Do people really need tax subsidies to borrow more to build bigger houses and buy more stuff?  Less leverage = less risk.

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#3) On December 19, 2007 at 8:15 PM, TMFBent (99.82) wrote:

Instead, I think that mortgage interest should not be tax deductable.  Many other countries do not have deductions for debt and consequently, their citizens are less levered.  Do people really need tax subsidies to borrow more to build bigger houses and buy more stuff?  Less leverage = less risk.

The Economist calls our tax breaks on mortage interest "Daft." I agree.

Hey, maybe if we start calling it "Homeowner Welfare," it won't seem like such a sacred moo... 

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#4) On December 19, 2007 at 8:16 PM, TMFBent (99.82) wrote:

Instead, I think that mortgage interest should not be tax deductable.  Many other countries do not have deductions for debt and consequently, their citizens are less levered.  Do people really need tax subsidies to borrow more to build bigger houses and buy more stuff?  Less leverage = less risk.

The Economist calls our tax breaks on mortage interest "Daft." I agree.

Hey, maybe if we start calling it "Homeowner Welfare," it won't seem like such a sacred moo... 

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#5) On December 20, 2007 at 3:38 PM, saunafool (98.67) wrote:

The way Americans end up paying for this is that it artificially props up non-market (too-high) housing prices for longer than necessary. If you want to buy, you should be able to get a deal because house prices should tank. Instead, Uncie Sam helps keep prices higher than they ought to be.

Solution: us rentlosers must keep rentlosing for longer than we should have.

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