A Democratic New York legislator is working on closing a loophole in the tax code that continues to penalize borrowers.
In a strange twist of legislative folly, a provision of the U.S. tax code winds up putting struggling homeowners under more pressure. Typically, homeowners unable to meet their mortgage payments broker some sort of a deal with their lenders, who generally agree to take a lesser sum given the circumstances. The problem, under Section 108 of the code, is that this unpaid money can be considered “imputed” income, meaning it’s taxable.

Clearly, though, these homeowners are in financial straits and have little to no money available to foot a tax bill. Longtime U.S. Rep. Charles Rangel has introduced House Resolution 3648, which would effectively repeal this outdated and unnecessary provision.

The same resolution would also allow FHA borrowers to continue to write off mortgage insurance for their loans through the end of 2014. These tax write offs can save the average homeowner somewhere around $350 annually.

For years adjustable rate mortgages (ARM’s) have been the preferred loan for both lenders and borrowers with less than perfect credit or low-moderate income.  The interest rates on ARM’s change after a few years sometimes more than once, getting higher.  Many of the interest rates on these loans have recently been reset or will be in the near future, making it difficult for many to make their monthly payments.  Over the past year this has caused a backlash to predatory loans, like ARM’s, as well as creating demand for changes in current FHA legislature.  In response to that demand the Federal Housing Administration has recently implemented a new refinancing program, called FHASecure, to help those borrowers with out of control payments.

FHASecure is essentially a bailout program for people with subprime loans.  It will help people with overwhelming mortgage payments avoid foreclosure by refinancing their loan.  To qualify a borrower must have a non-FHA-issued ARM, with an impending or recent rate reset.  Credit rating is less important than many borrowers seem to think.

A FHA loan is an excellent opportunity for borrowers, particularly because of the less stringent credit requirements and the lower interest rates.  FHA lenders can afford to provide borrowers with lower interest rates because the Federal Housing Administration guarantees the loans.  That same guarantee also helps make loans more available to those with less than perfect credit.

There are even more FHA reforms currently making their way through congress, including some that would increase loan limits in areas with higher costs of living and possibly eliminate the mandatory 3% minimum down payment requirement.