(Columbus)—Ohio Treasurer Richard Cordray today asked the state’s congressional delegation to support the Mortgage Cancellation Tax Relief Act of 2007 (HR 1876).

The bill would protect homeowners from owing tax penalties on any payment plans or restructuring they negotiate with their bank in order to avoid home foreclosure.

Homeowners are currently taxed on the amount of those adjustments.  This means that the payment plan or adjustment that homeowners work out not only could be less helpful, but could cost them even more.

“The current tax system penalizes people who are trying to do the right thing by trying to pay off their mortgages and avoid foreclosure.” said Cordray.  “We want to encourage homeowners who are having trouble paying their mortgage to contact their bank, work out a payment plan, and to be able to stay in their homes.  This bill will go a long way toward helping that happen for many people.”          

A copy of the letter from Treasurer Cordray to the Ohio delegation follows.

Dear Congressman Boehner,

Day in and day out, Ohio’s newspapers are documenting the growing crisis of home foreclosure in our local communities.  First as Franklin County Treasurer, and now as State Treasurer, I have seen Ohioans who are devastated by the impact of foreclosure and many others who are struggling to pay their mortgages and tax bills.  It is on their behalf that I ask you to support the Mortgage Cancellation Tax Relief Act of 2007 (HR 1876).

In the fourth quarter of 2006, the number of Ohioans in serious mortgage delinquency and therefore in danger of losing their homes stood at 5.12%.  More than 79,000 Ohioans across all ethnicities and income brackets were unable to find their way out of delinquency and suffered foreclosure last year.  Most of these homeowners did not intentionally buy more house than they could afford.  At last week’s meeting of Governor Strickland’s Foreclosure Prevention Taskforce, Freddie Mac’s chief economist reported that unemployment and illness in the family were the hardship reasons cited in 57.4% of delinquencies in 2006.

The Mortgage Cancellation Tax Relief Act failed to pass in the last two Congresses, even as mortgage delinquency problems have been only getting worse all the while.  I urge you to work quickly to pass this bill and provide needed relief to families who are trying to stabilize their precarious situations and avoid burdening society with yet another foreclosed home.

Under existing federal tax law, workout plans and loan restructuring agreements — which are key tools in our efforts to stave off foreclosures — are needlessly penalized.  When troubled homeowners are able to negotiate workout plans to restructure the terms of their mortgages and gain time to get onto a more sustainable financial path, the IRS now treats the extent of the adjustment as “realized income” to the troubled homeowner, which triggers a federal income tax bill that cannot conceivably be paid in many instances.

As a result of this tax treatment, the lender’s willingness to reduce the mortgage principal is not only less useful, but even can be potentially harmful to an already overextended borrower.  A lender taking the responsible step of cutting mortgage principal to bring a loan in line with a home’s realistic valuation triggers the unintended consequence of an IRS tax bill for the phantom income equal to the amount of reduced principal.  In many instances, the homeowner never sees any money from the transaction (with which to pay the new tax bill), but instead they are simply working out a mortgage with terms that are more sustainable over the short and long term.  Passage of HR 1876 would alleviate this problem.  In addition, and relatedly, passage of HR 1876 would also permit the use of short sales to avoid foreclosure and keep homes occupied, without adding a new tax burden on families that have just lost the largest investment they likely have ever made.

I am certain you share with me the belief that it is quite important for us to do whatever we can right now to help people stay in their homes and mitigate the broader consequences of the current mortgage foreclosure situation in Ohio.  To those ends, I am currently serving on the Governor’s Foreclosure Prevention Taskforce, and as part of that effort we are working to build Save Our Homes Commissions as broad-based coalitions in each county.  Education paired with effective loss mitigation efforts are essential to keep homes occupied.  With the swift passage of HR 1876, the current broad-based efforts to save families’ homes in Ohio will not be hamstrung by unexpected federal tax bills.

Thank you for your consideration.  Please feel free to call me anytime at 614.466.3639 to discuss this issue or any other matter if I can be helpful to you.

Sincerely,

Richard Cordray

Ohio Treasurer