[Congressional Record (Bound Edition), Volume 153 (2007), Part 23]
[Senate]
[Pages 31369-31370]
[From the U.S. Government Publishing Office, www.gpo.gov]




                    MORTGAGE CANCELLATION RELIEF ACT

  Mr. HATCH. Mr. President, I rise to speak concerning the Mortgage 
Cancellation Relief Act, S. 1394. In previous Congresses, I have 
introduced this legislation to provide immediate tax relief to 
homeowners adversely impacted by the recent downturn in the Nation's 
housing markets.
  However, this Congress, I am pleased to join my friend and colleague 
from Michigan, Senator Debbie Stabenow, as a cosponsor of S. 1394. She 
was on the floor earlier this morning, and she had the opportunity to 
address this bill. I want to thank her for her continued interest in 
this issue.
  I agree with her that it is well past time for Congress to act on 
this legislation.
  There are a number of positive things I can say about S. 1394. It is 
a bipartisan bill. It is sound tax policy. It is good economic policy. 
And it treats those who have been impacted by housing declines fairly 
in their time of need.
  As I mentioned, Senator Stabenow introduced this bill in May.
  The President recommended a similar proposal in August.
  However, the one not-so-positive thing I can say is that it is not 
law.
  We are now into November. And despite all of the positive aspects of 
S. 1394, it has still not been reported by the Finance Committee or 
debated on the Senate floor.
  The problem addressed by this legislation has its roots in the 
housing market.
  In September, overall home sales slid 8 percent from the month 
before. Single-family sales slowed to the lowest pace in nearly 10 
years.
  Inventory is going up. At the end of August, there was a 9.6-month 
supply of homes. At the end of September, there was a 10.5-month supply 
of homes on the market.
  So supply is up, and demand is down.
  A high school senior, barely paying attention in his economics class, 
could tell you the result.
  The result is a buyer's market. The median home price is down 4.2 
percent from the year before.
  With the dip in the housing market has come a corollary decrease in 
new home construction.
  According to one recent estimate, construction spending on all new 
homes fell by 22 percent in 2007. The decline was even greater for 
single family homes--25 percent.
  With another 4 percent dip in 2008, residential construction spending 
will be down to $254 billion in 2008 from $384 billion in 2005.
  While this is not good news for the Nation's builders, at least it 
tells us that the U.S. housing market is functioning rationally. As the 
supply of housing tightens, demand and prices will once again go up. 
This leads many economists to believe that housing markets will turn 
the corner sooner rather than later.
  In the meantime, however, we have a deadly economic mix of declining 
housing prices, interest rate volatility, and adjustable rate mortgages 
that are beginning to reset. When this convergence of events takes 
place and is followed by a certain unnecessarily punitive and totally 
unfair provision in our Tax Code, life becomes even more burdensome for 
some of our most vulnerable families and communities.
  Let me explain why.
  Adjustable rate mortgages are a product that provides an opportunity 
for millions of families to achieve home ownership. Because they pose 
less risk to lenders, these mortgages can be a more affordable product 
that allows families to purchase homes while assuming the risk that 
interest rates will increase.
  Yet because of the easy availability of adjustable rate mortgages, 
some people took out very high mortgages and according to the Wall 
Street Journal, there are 17 percent adjustable rate mortgage holders 
who cannot make their payments on time.
  We are currently witnessing how well private industry will be able to 
handle this problem on its own. The Nation's largest mortgage lender, 
Countrywide Financial, announced that it is modifying the terms of $16 
billion in adjustable rate mortgages. Thirty thousand have already 
restructured their loans, and Countrywide intends to contact 52,000 
borrowers to see if they would like to restructure their loans as well.
  Still, the declines in the Nation's housing markets have left two 
groups particularly vulnerable.
  First, there are those who sell their homes for less than the 
outstanding amount of the mortgage.
  Second, there are those who are unable to make their mortgage 
payments and suffer foreclosure.
  As I mentioned earlier, the Tax Code effectively kicks these folks 
while they are down.
  The Internal Revenue Code defines income very broadly.
  And when lenders forgive mortgage debt in a short-sale or a 
foreclosure, the borrower has technically received taxable income. Yet 
this is phantom income, and it makes little sense to have these 
financially vulnerable families getting a form 1099 and an increased 
tax liability for income they never received.
  This makes little sense as public policy. And it is inequitable as 
tax policy.
  Section 121 of the Internal Revenue Code allows the exclusion of up 
to $250,000--or $500,000 on a joint return--of gain on the sale of a 
home. Few people realize gains in excess of this statutory exclusion. 
And for those who do, those gains are taxed at lower capital gains 
rates.
  Yet if a family is in such a dire financial situation that it is 
losing its home or selling it at a loss, the phantom gain on these 
transactions is taxed at ordinary income rates.
  With adjustable rate mortgages being reset, growing housing 
inventory, and declining housing prices, too many people will be 
getting a 1099 form in the mail telling them that they owe income taxes 
on this debt forgiveness.
  This is not the way it ought to be.
  Our legislation would remedy this problem by excluding this debt 
forgiveness from gross income.
  There is precedent for this. Congress provided similar relief in the 
wake of Hurricane Katrina.
  Given the ramifications of housing market declines, we should extend 
this needed relief to all Americans who find themselves receiving this 
kind of phantom income.

[[Page 31370]]

  Yes, we would forgo some tax revenue by making this simple, fair, and 
commonsense change to our tax laws, but the House has found a 
reasonable offset that is supported by the housing industry so the net 
effect to the Federal budget should be zero.
  As I stated earlier, it is time to act. I am not sure what the delay 
is.
  The drop in the housing market and the problems with adjustable rate 
mortgages are no longer breaking news. It has been nearly 6 months 
since this bipartisan legislation was introduced. It has been over 2 
months since the President indicated he supported this legislation and 
wanted to get it signed into law.
  This Congress seems to have ground to a halt.
  You can hear crickets chirping on the Senate floor lately. To say we 
are too busy to address this important legislation is simply false.
  The lack of quick action on this legislation is no longer acceptable.
  I urge my colleagues to support S. 1394 and for the Senate to pass 
this legislation as soon as possible. Families in need and vulnerable 
communities demand that we act.

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