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Authors

Rue Toland

Abstract

In the midst of the recent housing crisis, Congress passed two key pieces of federal tax legislation in an attempt to stem the tide of foreclosures and prevent further economic collapse. These two bills, the Mortgage Forgiveness Debt Relief Act in 2007 and the Housing and Economic Recovery Act in 2008, both sought competing goals: lessening the harm to existing homeowners, and encouraging purchases by new homebuyers. However, neither bill adequately addressed one of the root causes of the housing crisis, namely homeowners obtaining mortgages that, for whatever reason, they could not afford. Indeed, the tax incentives these bills created would likely perpetuate that problem.

Instead of passing legislation that would provide tax incentives favoring responsible home purchasing, Congress enacted new laws that encouraged the very sort of risky behavior that led to the housing crisis in the first place. An analysis of the Congressional debates prior to the passages of the Mortgage Forgiveness Debt Relief Act and the Housing and Economic Recovery Act demonstrates that this failure stemmed in part from a misunderstanding by the legislators regarding how the new provisions of the Tax Code would work. This note explores the tension between the need for a short-term fix and the necessity of a responsible long-term economic behavior evident in the Mortgage Forgiveness Debt Relief Act and the Housing and Economic Recovery Act.

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