There are serious thought over the mortgage situation

The Obama government and private lenders are now giving serious thoughts to writing down mortgage principal amount. Following this the IRS has advised new directives to taxpayers who receive or are seeking to get this type of assistance if it is offered.

The Internal Revenue System is part of the measure that would entail the writing down of principal. According to the tax code of the federal government any debt that is forgiven by the lender that is more than $600 is taken to be taxable income.

However in 2007, legislation kicked off stating that some of the mortgage debts forgiven say thorough modification of loans, short sales or foreclosure could be exempted from taxes and would not be regarded as income.

The chairperson of FDIC Sheila Bair confirmed recently that her department was deliberating on this new measure to extend this plan of reducing the principal to help those borrowers who have gone underwater to avoid foreclosures.

Most of the banks and mortgage firms have so far given preference to reduction of monthly payments and other methods of loan modification rather than reduce the principal. Very few have waived off a part of the principal on the loan. Ocwen Financial Services, one of the biggest firms servicing sub-prime loans, has been strongly in favour of reducing principals so that the borrowers are kept out of foreclosures. The company claims considerable success in this matter.

The president of Ocwen Ron Faris testified before a congressional sub-committee recently in March. He said that the borrowers who have negative equity are twice as much likely to default again after a standard loan modification has been effected. In comparison those whose principals are partly forgiven do not re-default.

There is however tax implications when the lender recognizes the underwater position of the borrower and tries to prevent him from walking away agree to reduce the principal. The guidelines issued by IRS on 4th March stated the steps to be followed so that they become eligible for tax relief.

The tax relief applies only to the primary residences and not on second homes or commercial property. The maximum amount of debt forgiven is $2 million for married taxpayers who file jointly and $1 million for single persons. The loan has to have been used for buying, building or improving the primary residence. It must not have been used for other personal uses like clearing credit card dues, buying cars, stock investing etc.

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