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How the Fiscal Cliff Could Affect Homeowners

The "Fiscal Cliff" continues to dominate the news, as Washington works to avoid the detrimental impact to our fragile economy of doing nothing.  For homeowners, both current and future, there are several possibilities that could have a significant impact, not only personally, but on the real estate market as a whole.

Accoding to a recent article on Fox Business, there are several areas of concern.  First is the Mortgage Interest Deduction (MID).  While few people believe this will be eliminated entirely, the possibility does exist for it to be scaled back in some way, especially for higher income earners or higher loan amounts.  According to the article, Keith Gumbinger, vice president of states, “I believe the deduction won't be eliminated, but scaled back to coincide with the current conforming loan limits for high-cost areas...  So rather than a million dollar maximum limit, the total might be scaled back to $625,500, for example. Interest accrued on mortgage debt in excess of that figure would no longer be deductible.”

Another is the Mortgage Debt Relief Act of 2007, which is set to expire at the end of the year.  According to Keeping Current Matters, this act allows for any amount of debt forgiven to be excluded from taxable income, whether in loan modification or short sale.  For example, a homeowner who purchased their home for $300,000 is unable to afford the home.  So, instead of going to foreclosure (a several year process in New Jersey),  he decides to sell for $200,000, which is the market value and is agreed upon by the bank.  Let's say that individual earns $50,000 per year from his job.  Suddenly, his taxable income would jump to $150,000, but in reality, only has $50,000 from which to pay his taxes.  This would greatly discourage people from moving forward with short sales, thus increasing the number of foreclosures and further harming the market.

A final challenge is the continued lack of definition of what a "qualified mortgage" is under the Dodd-Frank law.  According to the Wall Street Journal, this has still not been finalized, and since banks would be on the hook for loans that don't meet this definition, are tending to the side of caution, which means tighter lending standards and fewer loans.  The hope is that this will all be worked out and finalized, but until then, it also looms on the horizon.

While there continues to be signs of recovery in the real estate market, these issues certainly could hamper it.  The sale of real estate creates jobs and helps to promote the economy, especially when done in a responsible way.  What happens in these three areas could needlessly hamper progress we've made towards economic recovery.  For those concerned, they should contact their representatives in Congress.  The hope is that all these things will be resolved before the end of the year, so we can move forward into the new year with certainty and a little more optimism!

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