Before the Great Recession, there was the foreclosure crisis of 2007. That was the year that the housing bubble popped and home negative equity soared. Many home owners negotiated with their lenders to keep their homes, while others lost their homes to foreclosure. The Mortgage Forgiveness Debt Relief Act of 2007 was one of the first measures to assist distressed homeowners during the financial crisis. The Act initially was to end in 2009 but has been extended annually. The Act was recently retroactively extended for 2017.
The purpose of the Act was to address tax liabilities that distressed homeowners faced when they tried to save their homes. Because debt forgiveness is typically considered taxable income, a mortgage balance reduction via mortgage modification or short sale would have resulted in a tax bill to a homeowner who was already experiencing a financial hardship.
Recent home equity gains in the housing market should help many home sellers who would have otherwise needed a short sale. Highlights from CoreLogic’s Q4 2017 Home Equity Report (corelogic.com) indicated that about 4.9 percent of mortgaged homes have negative equity (which is a huge improvement from the almost 31 percent reported in 2012 by Zillow’s Negative Equity Report). Additionally, CoreLogic reported that the national average of home equity gained by homeowners over the past year was in excess of $15,000. However, there is disparity in home equity growth by region.
Dr. Frank Nothaft, chief economist for CoreLogic stated:
“Home-price growth has been the primary driver of home-equity wealth creation. The CoreLogic Home Price Index grew 6.2 percent during 2017, the largest calendar-year increase since 2013. Likewise, the average growth in home equity was more than $15,000 during 2017, the most in four years. Because wealth gains spur additional consumer purchases, the rise in home-equity wealth during 2017 should add more than $50 billion to U.S. consumption spending over the next two to three years.”
The National Association of Realtors testified on March 14th to the U.S. House Ways and Means Subcommittee hearing on “Post Tax Reform Evaluation of Recently Expired Tax Provisions” to make the Mortgage Forgiveness Debt Relief Act permanent. In his testimony, Realtor Barry Grooms discussed the plight of many homeowners who are surprised to find that they are upside-down on their mortgage despite national home price gains.
Grooms made an argument why the Mortgage Forgiveness Debt Relief Act should be permanent. The Act has been retroactively extended each year in recent years leaving many short sellers “sweating it out” until the end of the year. Part of the decision-making process for a short sale is a potential tax liability. Many home sellers take the chance that the Act will be renewed retroactively. But others do not want to take the chance of incurring a large tax liability.
Negative equity statistics are likely to be erroneous. The number of homes with negative equity is probably under-represented due to deferred maintenance.
Yes, home prices have significantly increased, which has grown home equity. But the statistics for home equity assume that all homes are worth “retail value.” The retail value of a home is the full price a home can sell. In today’s market the home must be in better-than-average to excellent condition to sell for retail value. We don’t know the real value of any home until it’s sold.
In his testimony, Grooms touched upon a number of issues why homeowners are selling for less than they owe. However, not addressed by Groom is the number one reason why homeowners are under-water and why many home sellers need to sell via short sale. Property condition. The property condition crisis was highlighted in a February 2013 article by the Harvard Joint Center of Housing Studies entitled “The Return of Substandard Housing.” The lack of updates and/or deferred maintenance in a home can significantly decrease its value.
By Dan Krell
Copyright © 2018
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