Changes could curb foreclosures, save homeowners money
Changes that Congress made to the nation's tax laws could help homeowners facing foreclosure save their homes and help others get something back from costly mortgage insurance coverage.
A new measure allows people granted mortgage debt forgiveness or those who had a loan restructured last year not to be taxed on the money. Under the old law, if a person had a $100,000 mortgage forgiven, the government would have treated the $100,000 as taxable income.
The move will benefit those facing foreclosure that have exhausted all other means, said Bob Bunting, senior tax manager with Horne LLP.
"Those people, generally, have nowhere to turn at this point," he said.
In the first nine months of 2007, more than 5,600 foreclosure proceedings were initiated.
The mortgage industry modified or created repayment programs for 237,000 loans in the third quarter of 2007, a recent Mortgage Bankers Association report said.
In another break for homeowners, Congress expanded the mortgage insurance deductions to allow some people who pay private mortgage insurance to deduct a portion on their tax returns.
Homebuyers who borrow more than 80 percent of the property's value typically are required to purchase the insurance until they have 20 percent equity in their home. The insurance protects the lender if the borrower defaults on a loan.
Mortgage insurance costs as much as $100 a month for a single-family home with a median price of $217,600, the Mortgage Insurance Companies of America estimates.
The mortgage insurance deduction could save people who itemize as much as $300 to $350 in federal taxes, reports indicate.
Only people who purchased or refinanced their home in 2007 qualify for the new deduction. The change extends through 2009.
The deduction can be claimed only if the insurance was used toward what's known as "home acquisition debt," which comes about through buying, building or upgrading a primary or second home. The deduction for mortgage insurance premiums is phased out for taxpayers with adjusted gross incomes above $100,000.
The IRS isn't sure how many people might benefit from the actions Congress took late last year, spokeswoman Dee Harris said.
The new tax deduction will mean a loss of about $16 billion in tax-generated revenue in fiscal 2008 and 2009, according to the federal Joint Committee on Taxation.
Buck Coats, Horne's director of tax services for Mississippi, said the debt forgiveness and tax deduction measures are a good move to help people who made a one-time mistake in buying a home or whose finances have been hit by economic forces beyond their control.
They're the latest in a host of initiatives from the federal government aimed at reducing the housing and credit crises.
Last year, President Bush announced a freeze on subprime mortgage interest rates, and the Federal Reserve introduced several recommendations, including restricting lenders' ability to penalize low-income borrowers or borrowers with bad credit histories who repay loans early.
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