Fiscal Cliff Senate Bill Includes Help For Troubled Homeowners

WASHINGTON -- The Senate version of the legislation to avert the so-called fiscal cliff is littered with favors for select corporations. But it also includes a prime provision for troubled homeowners who receive mortgage relief from their banks.

Without the special clause, the limited foreclosure relief efforts that are currently in the works would be extinguished. Banks have been extremely reluctant to grant families debt relief on mortgages facing foreclosure. But tax policy is poised to poison any debt relief that borrowers could receive from banks -- unless Congress acts.

Millions of homes are worth far less today than what buyers paid for them during the housing bubble. Banks can often save money for themselves and investors by writing down the value of a troubled mortgage to the current value of the house -- thus averting costly foreclosure expenses. At midnight on January 1, 2013, the tax policy for this relief changed. Any debt that banks forgave would be counted as ordinary, taxable income for the borrower. If a $300,000 mortgage is written down to a $200,000 current home value, the homeowner is suddenly burdened with a tax bill for $100,000 in income.

As a result, a homeowner struggling to pay the bills would be faced with tens of thousands of dollars in taxes. That would destroy any hope of establishing future mortgage debt relief for troubled homeowners, as any bank leniency would result in heavy tax trauma for borrowers.

But the Senate version of the fiscal cliff bill would delay this tax policy change for a year. If the deal passes the House, the few mortgage modifications that are currently in the works will be able to proceed.