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Expiring Debt Relief Act increases mortgage defaults

Increasing numbers of homeowners are strategically defaulting on their loans in a race to beat the expiration of a law that has favorable tax consequences for foreclosures and short sales.

The Mortgage Forgiveness Debt Relief Act, which expires at the end of 2012, offers relief to homeowners who would typically owe taxes on forgiven mortgage debt after a foreclosure or a short sale.

Normally when a lender decides to forgive all or a portion of a borrower’s debt and accept less than what is owed, the “forgiven” amount is considered as income for the borrower and is taxable.

The Mortgage Forgiveness Act removes such tax liability for taxpayers whose loan is secured by their primary residence.

YouWalkAway.com, a foreclosure prevention agency, conducted a national survey and found that 34 percent of respondents indicated that the Act contributed to their decision to walk away sooner rather than later from their property.

Those surveyed were YouWalkAway.com clients who were actively considering or navigating through the foreclosure process.

“The survey results are not surprising; YouWalkAway.com saw a number of homeowners reach out to us in early and mid-2011 due to the impending 2012 deadline,” said Jon Maddux, CEO of YouWalkAway.com, in a news release. “Many were prompted to begin the foreclosure process in 2011 in order to ensure their foreclosure is complete by the end of 2012.”

It is unclear yet if Congress will extend the Mortgage Forgiveness Act past the 2012 expiration.

In March, Rep. James McDermott sponsored House Bill H.R. 4290 to extend the Act to 2015. H.R. 4290 is currently in committee.

If the Act is not extended, it could have an impact on the market as homeowners weigh a foreclosure or short sale versus a potential tax bill.

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