- The Washington Times - Friday, October 5, 2007

Financial relief for homeowners facing foreclosure or in bankruptcy advanced yesterday as the House approved legislation to help those financially strapped.

The bill, which passed 386-27, would give a tax break to homeowners who have mortgage debt forgiven as part of a foreclosure or a reworking of a loan. The value of that forgiveness, which is now taxable as income, would become tax-exempt.

While the measure is anticipated to reduce the taxes of some pressed homeowners by $650 million, it also looks to help offset that by limiting a tax break available on the sale of second homes.

Another measure, narrowly approved by a House Judiciary subcommittee and opposed by Republicans on the panel has been sent to the full Judiciary Committee. It would revise the bankruptcy code to help homeowners facing default and foreclosure, biting into already hard-hit profits at mortgage lenders.

That bill would allow judges to order mortgage lenders to ease terms for homeowners in bankruptcy proceedings. Currently, mortgage lenders can foreclose against a homeowner in default 90 days after the filing of bankruptcy.

Legislation similar to both bills is pending in the Senate.

Mortgage lenders would be “terrified” of getting wrapped up in bankruptcy proceedings, said Brian Gardner, a research analyst with investment firm Keefe, Bruyette & Woods.

The House vote was the latest congressional reaction to a mortgage crisis touched off this past spring by a blowup in high-priced home loans for risky borrowers, which has thrown a pall over the economy. An estimated 2 million to 2.5 million adjustable-rate mortgages — worth some $600 billion — will jump from low initial “teaser” rates to higher rates this year and next. Steep pre-payment penalties have made it difficult for some to get out of their mortgages, and some overstretched homeowners can’t afford to refinance or sell their homes.

Foreclosures are at record highs and late payments are spiking. Lenders have been forced out of business and investors have taken huge financial hits.

The House last month passed legislation to expand backing of mortgages by the Federal Housing Administration, which now insures some 3.7 million loans in the event of default, with a view to helping struggling homeowners avoid foreclosure.

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