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Wednesday, April 23, 2014

Why did the government allow the Mortgage Forgiveness Debt Relief Act to expire?

By Paul Ritz

Underwater mortgages
Mortgage debt forgiveness helps "underwater" home owners
The Mortgage Forgiveness Debt Relief Act expired on December 31st 2013. Since then, there has been a constant demand for its re-enactment, but until now the government has maintained its silence over this issue.

Even though the current state of American economy is far better than what it was 4 years ago but a lot of people are still facing financial hardships.

Numerous surveys and opinion polls have confirmed that the general American population was in favor of re-enactment of the Mortgage Forgiveness Debt Relief Act. The law was enacted for the first time in 2007. 

The intention with which the Obama administration passed this law was undoubtedly in favor of the middle class population. It introduced the much needed provisions and provided some temporary relief to those who were finding it difficult to repay their residential debt. As the situation demanded, the law was reenacted in the subsequent years too. It was widely speculated that the law will be renewed again, but the government allowed it to expire on December 31st 2013. Since then many organization have petitioned Whitehouse to reenact the law. Let’s try to understand why the government allowed it to expire.

The government’s intentions

During the last few months, it became clear that the chairmen of the Senate Finance Committee and House Ways and Means Committee are inclined towards cementing some comprehensive tax reforms before the end of this year. In their official statements they have stated that they intend to check the long list of expiring acts, remove the ones that are no longer needed and make the ones permanent that are worthy and needed in the favor of the American people. The problem is that it will take some time for the tax reforms to be legislated. If the government reenacts the Mortgage Forgiveness Debt Relief Act temporarily then it sends out a message that the Whitehouse is going cold feet on the issue of permanent tax reforms.

Loss to the exchequer

The Mortgage Forgiveness Debt Relief Act allows the people to save on forgiven debt. In the absence of the provisions of this act, the forgiven debt is seen as taxable income. It directly implicates that the reenactment of this law means less revenue for the federal government. At times when the government was about to go default on its debt, lesser revenue is not something to be very cheerful of. This situation has sparked a debate in the Whitehouse circuit. Some senators prefer to raise taxes in order to increase the federal revenue while some prefer to cut on government spending in order to recover the loss. It is estimated that during 2007 to 2013, the Mortgage Forgiveness Debt Relief Act costed the government about 24 billion U.S. Dollars.

The change in leadership

The former chairman of the Senate Finance Committee, Senator Max Baucus from Montana, was in favor of reenacting the Mortgage Forgiveness Debt Relief Act. But before the Congress came into session he was appointed as the U.S. Ambassador to China. The new chairman of the Senate Finance Committee is not that excited about this cause and hence it is taking sometime for the lobbyists to persuade him for renewing this act. It must also be understood that it takes some time for the new leadership to adjust itself to the dynamic political scenarios.

About the authorPaul Ritz is an associate at National Debt Relief. Consumers can take advantage of a free debt counsolidation session to discover their options for debt relief with no obligation.

Image license: ajmexico, CC BY 2.0