Mortgage reductions will mean taxable income to homeowners because their debt has been reduced. In turn, because 'banks' which reduce mortgage debt have forgiven debt, they will get a tax deduction or a tax exemption. Congress would have to enact a law to change this tax situation. See Shaila Dewan, "Welcome Relief, Then Tax Bill" p. B1, col. 2 (New York Times Nat'l ed., "Business Day" Section, Wednesday, February 5, 2014). If you don't like the color blue, don't hold your breath waiting for the U.S. House of Representatives to do anything like enacting a law.
This adds insult to obvious injury. Mortgage reductions are generally given to those homeowners who are "under water" on their mortgages, meaning that their homes are worth less than the unpaid balance on their home mortgages.
Taking the insult a step away from the direction of bad faith, banks and underwater homeowners are not the only parties on the scene with incentives in the situation. Mortgage insurance companies have an interest in not paying out on their policies. In other words, mortgage insurance companies have an interest in homeowners paying their mortgages. If homeowners stop paying on their mortgages, banks may claim that they are owed the full policy limit of the original mortgage policy which was issued for the full unpaid balance due of the mortgage involved. It is in the interest of mortgage insurance companies to see that homeowners keep paying on their mortgages.
© 2014 by Dennis J. Wall. All rights reserved. No claim to original U.S. Government works.
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