A recent report from CoreLogic hypothesizes that the expiration of the Mortgage Debt Forgiveness Relief Act (MDFRA) on Jan. 1 of this year will result in a significant drop in the number of short sales.
The act, which was passed by Congress at the end of 2007 as the financial crisis was beginning to take hold, was a temporary measure to provide tax relief to homeowners going through foreclosure. Under the act, any additional income coming from the resolution of a debt by a lender – whether through foreclosure, deed-in-lieu or short sale – was exempt from taxation.
However, now that the act has been allowed to expire, homeowners must once again pay tax on any loan amount that is forgiven – or in the case of short sales, any additional income generated by the sale.
According to CoreLogic, short sales volume dropped 0.6% in January compared to December to account for 4.6% of total sales. In December, short sales accounted for 5.2% of all sales.
What's more, short sales were forecast to drop even further in February, to as low as 2.2% of all sales, primarily due to the expiration of the MDFRA, according to the April 15 MarketPulse report.
As pointed out in the report, Congress is currently considering two bills – one in the house, the other in the Senate – that propose extending MDRFA, both of which are strongly supported by the National Association of Realtors. Both would make the Act retroactive to Jan. 1. However, it appears unlikely that Congress will take up either measure this session.
Meanwhile, it will be interesting to see whether servicers continue to push short sales as an option to mortgage modifications/principal write-downs – and further whether borrowers opt for them. Because, either way, the homeowner is on the hook for the tax, which must be paid on either the proceeds from the short sale or the amount of forbearance provided.
To download a copy of the report, click here.