End of Debt Forgiveness

Will rental markets reel?

By Erica Rascón on Feb 6, 2014 in News

Just when we thought the housing market was stabilizing, the Mortgage Foreclosure Debt Forgiveness Act ended. To date, the act has not been extended, which could lead to a few notable changes in both the single-family and multi-family markets.

Before 2007, a mortgage owner could receive a break on their loan as long as that forgiven debt was taxed. When the Mortgage Foreclosure Debt Forgiveness Act passed that year, it eliminated the tax on forgiven debt, allowing more cash to stay within the household. Homeowners were able to get back on their feet and into a rental—or even another house–more quickly.

In January 2014, the Mortgage Foreclosure Debt Forgiveness Act came to an end.  According to the National Association of Realtors, reinstating tax on forgiven debts may affect many of nearly 10 million Americans with underwater properties; currently, 14.5 percent of homes in the US are still in negative equity, reports the National Association of Attorneys General.

Homeowners with underwater properties will be dissuaded from short sales and other measures of foreclosure prevention since they often don’t have the means to pay the difference between the mortgage cost and the home’s current value. They likely unable to pay high taxes on forgiven debts, either. Homeowners may still qualify for an insolvency exclusion but it’s a tedious route

The result: more foreclosures. RealtyTrac reports that more than 1.2 million properties throughout the nation are in some stage of foreclosure. States such as Delaware, Maryland, and Connecticut were inundated with distressed properties during the recession and they will continue to see high numbers of bank repossessions.

With fewer assistance programs in place, these homeowners will continue to enter the rental market in numbers higher than previously expected. The continued flow of tenants may keep vacancy rates woefully low. Reis Inc. reported that the fourth quarter vacancy rate fell 0.1 percentage point to 4.1 percent. That’s the lowest vacancy rate since the third quarter of 2001. Rent rates are also raising, providing few options for a desperate group of consumers.

Beacons of hope may be on the horizon for consumers. The newly distressed properties may feed into the rental market. Investors will have the opportunity to buy bank-owned homes and convert them into rentals. To provide even more options, fourth quarter building permits experience a 17.5 percent increase compared to the same time in 2012. Houses for rent and newly constructed rental housing may balance the playing field so that rent prices and vacancy rates can finally stabilize to pre-recession figures—or better, with fingers crossed.

New rentals won’t help the decreased property values of single-family homes near distressed properties. New rentals can’t invigorate new home sales that stagger to compete with the prices of foreclosures. But at least these new properties provide a silver lining to an otherwise unfortunate forecast for renters.