New federal laws and regulations have created major changes in the mortgage industry. They impact the way lenders qualify borrowers this year, and in some cases will put more money in the pockets of homeowners.
The president has signed legislation implementing a law that eases the tax burden for homeowners who have had debt forgiven on a mortgage due to a foreclosure or short sale.
Previously, the tax code required a lender who forgives debt to provide a Form 1099 to the IRS stating the amount the borrower had been forgiven. Then, if the property was sold at foreclosure or was sold for less than what was borrowed, the difference was considered income and subject to be taxed.
The new legislation provides a temporary, three-year change to the tax code to eliminate taxes homeowners might face when banks renegotiate the terms of a home loan and forgive a portion of the outstanding mortgage balance. The change in the tax law will cap untaxable forgiven debt at $2 million and apply only to principal residences.
Most real estate and mortgage organizations support the new law.
"This bill helps address the subprime lending crisis by preventing strapped homeowners from taking a tax hit to restructure their mortgages and allow them to stay in their homes," said Brian Catalde, president of the National Association of Home Builders.
The law - Mortgage Forgiveness Debt Relief Act - removes the tax burden on mortgage indebtedness, encourages market-based restructuring between lenders and homeowners, and discourages foreclosures.
The bill also extends the tax deductibility of the Federal Housing Administration and private mortgage insurance premiums over the next three years. That tax break had been scheduled to expire at the end of 2007. It has been estimated that this bill would give an average tax break of about $350 to taxpayers who pay premiums for mortgage insurance.
Yet another much-publicized plan is to allow modifications of certain mortgage loans or freezing the interest rates for up to five years.
"The dream of homeownership should not turn into a family's worst nightmare," said Richard Gaylord, president of the National Association of Realtors. "The loan modification program is a good first step in helping deserving families keep their home."
To prevent abuses of the past, new rules on mortgage lenders are being proposed by the Federal Reserve. Acknowledging that many home mortgage lenders aggressively sold deceptive loans to borrowers who had little chance of repaying them, the Fed is proposing a broad set of restrictions on exotic mortgages and high-cost loans for people with weak credit.
The new rules would force mortgage companies to show that customers can realistically afford their mortgages. They would also require lenders to disclose the hidden sales fees often rolled into interest payment, and they would prohibit deceptive advertising. Borrowers would be able to sue their lenders if they violated the new rules, but homeowners would be allowed to seek only a limited amount of compensation.
"Unfair and deceptive
