Dan Walters

Dan Walters: There’s a darker side to Californians’ mortgage relief: big tax bills

Two years ago, Attorney General Kamala Harris trumpeted a landmark deal with the nation’s three largest housing lenders, which agreed to give beleaguered California homeowners $12 billion in relief from their underwater mortgages.

Last fall, the monitor that Harris appointed to supervise the agreement reported that the $12 billion promise had become “an $18 billion achievement,” half in principal reductions for those who wanted to remain in their home and half in short sales for those who wanted out.

“A home saved from foreclosure helps stabilize the neighborhood, prevent blight and buy up housing prices,” the monitor’s report said.

Harris announced her bid for re-election to a second term the other day and touts the deal as a major achievement. She’s considered a prospective future candidate for governor or U.S. senator.

There is, however, a darker side to the situation. That $9.2 billion in principal reductions from the three big lenders, plus those granted by other mortgage firms, is considered to be income to those who received them – an average of $137,281 for first mortgages in the settlement and $91,261 for second mortgages.

That means the homeowners who breathed sighs of relief last year could be hit with huge income tax bills.

They wouldn’t be federal taxes, because Congress exempted principal reductions from taxation. But they would be state taxes for 2013, because a temporary exemption expired at the end of 2012 and the Legislature didn’t act last year on an extension due to a behind-the-scenes power play.

The Senate passed a bill to extend the tax exemption, but at the last moment, at the behest of Senate President Pro Tem Darrell Steinberg, a seemingly tiny amendment was made, saying it could not take effect unless another bill, Senate Bill 391, also became law.

SB 391, also passed by the Senate, imposes fees on real estate transaction documents to raise about $300 million a year for low-income housing. It’s one of the Legislature’s efforts to make up for the money that low-income housing programs lost when it and Gov. Jerry Brown abolished local redevelopment programs two years ago. It stands scant chance of passage in the Assembly due to fierce opposition from the real estate industry.

The extra language in the tax bill, aimed at compelling the industry to back down on its opposition SB 391, is called a “poison pill” in Capitol jargon.

However, it’s resulted in a stalemate, with both bills languishing in the Assembly. Unless the tax exemption is enacted very quickly, tens of thousands of Californians will be compelled to pay state taxes on those mortgage write-downs.

A new bill to retroactively reinstate the tax exemption has been introduced, sponsored by the California Bankers Association.

What happens to it is anyone’s guess.