The real estate blog.

I’ve been noticing a lot of inbound traffic coming about some of the pending mortgage related legislation designed to reduce the number of foreclosures.

There are three key pieces of legislation pending. All are at different points in the process.

H.R. 1852 - Expanding American Homeownership Act of 2007

This is the key FHA reform legislation. It has passed both the House of Representatives and the Senate Banking Committee. However, it will probably not go before the full Senate until next year. Due to substantial differences in the House and Senate versions, it may never become law.

H.R. 3648 - Mortgage Forgiveness Debt Relief Act of 2007

Designed to eliminate the tax burden of forgiven mortgage debt for those homeowners who do lose their homes through

foreclosure, a sheriff’s sale or deed in lieu of foreclosure, this legislation was passed by the House of Representatives this week.

The popular bill passed 386 – 27 with overwhelming bipartisan support. Similar legislation is pending before the U.S. Senate.

According to a release from the House Ways and Means Committee, “Under current law, debt forgiven following mortgage foreclosure or renegotiation is considered income for tax purposes, resulting in tax liability for individuals and families.”

This bill would provide tax relief to families by permanently excluding debt forgiven under these circumstances from tax liability.

Once aspect of this bill that has been glossed over is how it’s going to be paid for. The answer…excluding tax deductions for people who sell second homes.

The bill amends the current law exclusion of up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a principal residence. Under current law, the sale of a home will qualify for this exclusion if the home is a taxpayer’s principal residence for at least two of the five years ending on the sale or exchange. This exclusion applies even if the home was initially purchased as a second home. Under the bill, if a taxpayer moves their principal residence to a second home, the taxpayer will only be able to utilize this exclusion to the extent that it relates to the period of time when the home was first used as a principal residence. The bill grandfathers use before 2008. This proposal is estimated to raise $2.005 billion over 10 years.

This is Robin Hood legislation, giving to the have nots from the taxes of the haves. I suspect this is legislation that will either be amended in the Senate or tabled indefinitely like HR 1852. I doubt President Bush would ever sign a law like this.

Temporarily raising Fannie Mae/Freddie Mac lending limits

Don’t get confused by lending limits and loan limits. Loan limits refer to the amount of a single mortgage, lending limits refer to the total amount the two GSEs can guarantee at a time. Raising the lending limits will inject further liquidity and allow borrowers facing rate increases a better chance to refinance.

House and Senate lawmakers said Thursday they will support legislation that permits Fannie Mae and Freddie Mac to increase holdings of mortgages and mortgage-backed securities by $74 billion each, or 10 percent above current limits of $735 billion - for six months.

Of the total $147 billion increase, 85 percent, or $125 billion, would be targeted at helping borrowers with weak, or subprime, credit refinance loans due to reset at sharply higher rates.

There is no current legislation pending to make this proposal become a reality, but Congressmen are hoping to act fast.

Sen. Charles Schumer, D-N.Y. said in a statement Thursday that he plans to attach the proposal to the “first available” bill headed for a Senate vote. A companion bill by Rep. Barney Frank, D-Mass., could be introduced as soon as Friday, a spokesman said.

The proposed legislation is only short term because of previous accounting scandals at Fannie and Freddie where the two giants understated earnings.

Regulators have also said they are reluctant to allow higher portfolio caps at Fannie and Freddie until the mortgage giants return to a routine schedule of filing financial results, which was derailed by their accounting problems.

To recap, the three proposed pieces of legislation designed to help homeowners facing foreclosure are nowhere near reality.

HR 1852 - Stalled in the Senate
HR 3648 - Not voted on in Senate committee. Not likely to pass Senate unless amendments are made
Fannie/Freddie limit increase - Not even in legislation

Meanwhile, foreclosure activity doubled last month.