WASHINGTON, DC-Attention in the commercial real estate industry is turning to efforts in Congress to pass another extension of the Mortgage Forgiveness Debt Relief Act of 2007. Besides continuing the fuel the housing market, some proponents of the extension also say it could buttress the GSEs efforts to promote debt relief--especially if and when a new director of the Federal Housing Finance Agency is confirmed.

First, though, a brief look at the MFDRA. The act exempts homeowners from having to pay taxes on mortgage debt that is forgiven, usually via a short sale or loan modification. Otherwise, the forgiven debt is taxed as income. Three bills have been introduced to extend the measure, and according to The Hill, they are garnering bipartisan support. They face an uphill climb, though, as time is running out for this legislative year and most of Congress' efforts are going to hammering out a budget deal.

That said, there is a possibility something could pass, David Johnson, president of Strategic Vision, tells GlobeSt.com. "It is a good issue to run on in the election – that is half of why it is being proposed."

Another moving part to consider: the Internal Revenue Service recently clarified that borrowers in non-recourse states can avoid the tax hit. Sen. Barbara Boxer of California requested clarification on the issue and in mid-November the agency responded. California borrowers are now among those exempt from having to pay tax on the forgiven debt. "Because the federal Mortgage Forgiveness Debt Relief Act of 2007 exempted any forgiven mortgage debt from being counted as income, homeowners in California and elsewhere who engage in a short sale currently do not have to worry about being hit with a large tax bill on this forgiven debt," Senator Boxer noted.

Borrowers in other states, though, may not enjoy this protection, hence a push by CRE organizations to extend the measure. The Hill reports that the Mortgage Bankers Association and the National Association of Realtors are among those lobbying for an extension, primarily because without the protection under the act homeowners are more likely to opt for foreclosure. Lenders are reporting that underwater borrowers are more inclined to walk away because the measure might not be passed, according to comments made by Jamie Gregory, deputy chief lobbyist for the NAR.

"They're afraid the provision won't be extended, and they don't have the money to pay a tax bill, so they're just better off walking away," he told The Hill.

Whether the act is renewed could be significant for GSE reform efforts as well, especially with the Federal Housing Finance Agency's Acting Director Edward J. DeMarco on his way out. U.S. Rep Mel Watt (D-NC) is likely to be confirmed as the new director early as Dec. 9 when the Senate returns from recess, TheStreet reports--thanks to the Senate's maneuver last month to change the rules approving nominees with a simple majority. Watt's nomination had been blocked by Republicans in October. If he makes it through under the simpler procedure, he is expected to make changes as the agency and the GSEs, including a proposal that would allow the GSEs to forgive principal on loans. That step, however, would only be effective if the MFDRA extension is passed.

One group that may be hoping to see the Mortgage Forgiveness Debt Relief Act quietly sunset are the institutional investors that have been snapping up foreclosed homes to turn into rentals. There have been signs that, while still profitable, foreclosed homes are no longer trading at earlier low prices. That may change if more come to market.

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Attention Turns to Extending the Mortgage Forgiveness Act

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