Tax relief for struggling homeowners set to expire

November 30, 2013 2:48 PM

A Boston community development group is calling on Congress to extend federal tax breaks that have helped hundreds of struggling homeowners in Massachusetts and across the nation to avoid losing homes to foreclosure.

Boston Community Capital said that the program known as the Mortgage Forgiveness Debt Relief Act is still needed even as the foreclosure crisis has subsided in many parts of the country, aided by rising home prices and rebounding sales. The program is set to expire at the end of the year.

“If you are living in an inner-city area, your home price is not up, and your ability to sell at full market value is really not present,” said Elyse Cherry, the organization’s chief executive. “Things have improved, but they have not improved everywhere.”

The act was signed into law in 2007 at a time of soaring nationwide foreclosures and plummeting home prices. It let homeowners avoid having to face sizeable tax bills in short-sales — when banks agree to sales for less than the amount owed on the mortgage — and other instances in which mortgage debt is reduced.

That type of debt cancellation was typically considered taxable income by the Internal Revenue Service. For instance, if a homeowner’s mortgage principal was reduced to $300,000 from $400,000, he or she would normally have to pay taxes on the $100,000 difference.

The act helped organizations such as Boston Community Capital develop home repurchasing programs for homeowners facing foreclosure and possible eviction. Its initiative, called Stabilizing Urban Neighborhoods, buys homes in foreclosure and then sells them back to the former owners at lower prices. The program also provides a new 30-year mortgage that reduces payments by an average of 40 percent.

Boston Community Capital, which has historically funded community development projects in low-income neighborhoods, started the foreclosure program in 2009. This year, it received a $35 million loan from East Boston Savings Bank for the effort. So far, Boston Community Capital has lent more than $65 million and reduced mortgage principals by a total of $30 million.

The group recently expanded to Maryland. It is looking to bring the housing initiative to eight other states.

Senators Elizabeth Warren and Edward J. Markey are both cosponsors of a Senate bill that would extend the debt relief act for two years. A similar bill has been filed in the House with support from the Massachusetts delegation. The act was extended last year just before it was set to expire Dec. 31.

Since then, the housing picture has improved significantly. Locally, the number of announced auctions in September fell by nearly 20 percent, compared with September 2012, while the number of completed foreclosures plunged 52 percent during the same period, according to the Warren Group, a firm that tracks real estate and foreclosure activity.

But homes are still being foreclosed on, said Cherry. In October, 133,919 foreclosure filings were recorded nationally, according to the real estate tracking firm RealtyTrac.

“This crisis is not over,” she said.

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