AP Photo/Mike Groll

We need get the housing market back to normal as quickly as possible. So isn't reauthorizing the Mortgage Forgiveness Debt Relief Act a no-brainer?

Even as it continues to improve, the specter of negative equity—those homeowners that are underwater on their mortgages, owing more to the bank than their home is worth—will act as an anchor on the housing market for years to come. But rather than acting to help ease the problem, Congressional inaction is instead keeping a lifeline away from drowning homeowners.

As of the end of the second quarter, 17 percent of Americans with a mortgage were underwater. That’s down from 18.8 percent in the first quarter and 23.8 percent in the second quarter of last year, which is real progress. But when almost nine million homeowners with a mortgage nationwide still can’t or won’t realistically enter the market because they’re underwater, the pool of eligible buyers and sellers shrinks, sales volume falls and inventory gets tighter.

At best, high negative equity leads to a decrease in mobility—more people simply stay put in their homes, stuck underwater or unable to find a home they can afford. At worst, it leads to higher foreclosure activity, as desperate homeowners default on loans that are increasingly burdensome, or simply choose to walk away from homes that are too far underwater.

But, at least in recent years, there have been other options. Under the federal Home Affordable Modification Program (HAMP), homeowners worked with their lenders to reduce the amount owed on their mortgages through a reduction in principal, enabling millions to stay in their homes at more favorable terms, even if they remained underwater.

Many underwater homeowners have also considered a short sale, working with their lender to solicit offers for their home that were less than the outstanding loan amount, but still acceptable. In many cases, short sales allowed lenders to recover more money than if they had allowed the home to proceed through the often lengthy and costly foreclosure process.

But as of Jan. 1, loan modifications and short sales, generally the most effective cures for negative equity—short of time itself—no longer represent the comparative bargain they once were. Beginning in 2007 and continuing through 2013, the Mortgage Forgiveness Debt Relief Act waived federal tax rules that otherwise would have counted forgiven debt (foreclosures, short sales, and loan modifications that include principal forgiveness) as taxable income. But Congress has so far failed to reauthorize the debt relief act for this year, choking off a potential outlet for underwater borrowers.

Without this waiver, if a lender forgave, say, $20,000 in debt, a borrower would then have to pay taxes on that debt as ordinary income. For borrowers in the 25% tax bracket, this represents $5,000 they’d need to pay out of pocket.

Opponents of reauthorization argue that the perpetually cash-strapped federal government is giving up too much money by forgiving billions of dollars in taxable “income.” Estimates on lost federal revenue range from roughly $2.6 billion over two years to more than $6 billion, according to a recent study by the Urban Institute.

That’s real money, but the costs of not reauthorizing the act could be much, much higher.

Underwater homeowners should always evaluate all of their options before defaulting, because walking away from a deeply underwater home has terrible economic consequences, including ruined credit and an inability to buy another home again for a number of years. But, absent debt relief provisions, those options are now—unnecessarily—much more limited.

There are also some profoundly unfair aspects of taxing debt relief. When homeowners sell a home after it has increased in value, the capital gain received is generally not taxed. So, Uncle Sam doesn’t care about collecting revenue from rising home prices, but does want in on the action when home prices fall. What’s the public policy rationale of that? Second, if you live in states with non-recourse home loans (e.g., California), you are not subject to the debt forgiveness tax at all. Does it really make sense that our treatment of debt forgiveness be the result of some geographic roulette game?

Negative equity is bad enough on its own, and has gummed up the housing markets for far too long. We need to do everything we can to get back to normal as quickly as possible. Reauthorizing the Mortgage Forgiveness Debt Relief Act, in this sense, is a no-brainer. And it’s not too late for Congress to act. Any reauthorization before the end of this year could easily be made retroactive to Jan. 1, effectively ending this entire debate and allowing short sales and loan modifications to be pursued as the effective solutions they are.

This post originally appeared on Quartz, an Atlantic partner site.

More from Quartz:

Late to Watches, Apple Set Its Own a Minute Early

Working For The Chinese Government Is Now as Miserable as Working in a Factory

Why Amazon Has No Profit—And Why It Works


About the Author

Most Popular

  1. A photo of a cyclist on the streets of Chicago's Pilsen neighborhood.

    Can Historic Preservation Cool Down a Hot Neighborhood?

    The new plan to landmark Chicago’s Pilsen neighborhood aims to protect more than just buildings: It’s designed to curb gentrification.

  2. A cat lays flat on a bench at a park on the outskirts of Tokyo.

    Why Don't Americans Use Their Parks at Night?

    Most cities aren’t fond of letting people use parks after dark. But there are good lifestyle, environmental, and safety reasons to reconsider.

  3. Design

    What Cities Can Do to Help Birds and Bees Survive

    Pollinators—the wildlife that shuffle pollen between flowers—are being decimated. But they may still thrive with enough help from urban humans.

  4. Rows of machinery with long blue tubes and pipes seen at a water desalination plant.

    A Water-Stressed World Turns to Desalination

    Desalination is increasingly being used to provide drinking water around the globe. But it remains expensive and creates its own environmental problems.

  5. a photo of a woman covering her ears on a noisy NYC subway platform

    My Quixotic Quest for Quiet in New York City

    In a booming city, the din of new construction and traffic can be intolerable. Enter Hush City, an app to map the sounds of silence.