The new mortgage cancellation bill, HR 3648, is scheduled to be on the House floor on October 5. Under current law, forgiven mortgage debt is treated as taxable income and taxed at ordinary income rates. The legislation would provide a permanent excluding forgiven mortgage debt on a principal residence, up to $1 million. There is no income restriction on those who are eligible for the relief. The revenue estimate for the provision is $1.4 Billion over 10 years. A "pay-for" has been identified that will tighten, but not eliminate, a benefit of current law.

A harsh reality of tax law changes is that any benefit provided to taxpayers must be "paid for" with a revenue offset. In order to "pay for" the mortgage cancellation relief, the Ways and Means Committee modified, but did not eliminate, a tax planning opportunity for owners of vacation and rental properties. Under current law, the owner of a vacation home or rental property sell his/her principal residence, exclude up to $500,000 of the gain from taxation, and then convert the second property into his/her principal residence. Once the 2-year residency requirement has been satisfied, the individual may sell that property and once again exclude as much as $500,000 from taxation.

The new rule modifies the application of the exclusion when an individual converts a rental or vacation property to his/her principal residence. Under the new rule, effective January 1, 2008, the owner will still have the option of receiving the benefit of the exclusion, but will be required to pay capital gains taxes on the appreciation attributable to the time that the property was used as an investment property. The amount excluded will be a fraction, determined at the time the vacation/rental property is sold. Assuming that the owner has satisfied the 2-year residence requirement, the amount of gain that can be excluded will be determined by a fraction. The numerator of the fraction will be the number of years the property was used as a principal residence. The denominator will be the number of years the individual actually owned the property, measured from January 1, 2008. Thus, the legislation has no retroactive impact. Congress sought a policy that would provide a capital gains exclusion on a principal residence only for the time that the property was actually used as a principal residence.

It appears the legislation will likely pass by a considerable amount.

The House of Representatives, on September 27, passed HR 3121, a bill to reform the National Flood Insurance Program by a vote of 263-146. NAR supported the bill, which reforms the NFIP by:

· Increasing coverage limits to $335,000 for residential and $670,000 for commercial properties;

· Adding coverage for living expenses, business interruption, and basement improvements;

· Extending the NFIP for five years (until Sept. 30, 2013);

· Requiring notice of availability of flood insurance and escrow in RESPA GFE;

· Allowing for the purchase of wind insurance through the NFIP at "actuarial" (i.e., unsubsidized) rates;

· Providing direct funding of mitigation activities for individual repetitive loss properties;

· Extending pilot program for mitigation of severe repetitive loss properties;

· Requiring FEMA to map the 500-year floodplain as well as update 100-year maps, while ensuring that the 100-year flood maps are updated as expeditiously as possible;

· Raising the cap on annual premium increases to 15% from 10%; and

· Gradually phasing out subsidies for non-residential properties and non-primary residences beginning in 2011.

The bill also requires a study of the impact of phasing out subsidies within one year of enactment. This provision was added to the bill in response to concerns expressed by NAR that eliminating subsidies would result in higher premiums, increase the cost of homeownership and rental housing, and could lead to reduced property values, increasing delinquencies and foreclosures. If significant impacts are found, Congress would have sufficient time to revisit the subsidy phase-out before it takes effect.

The Senate Committee on Banking, Housing and Urban Affairs held a hearing today titled "An Examination of the National Flood Insurance Program". REALTOR Vince Malta testified on NAR's behalf.

On September 18, 2007, the House of Representatives passed HR 1852 the "Expanding American Homeownership Act of 2007" by a strong vote of 348-72. The bill includes provisions to eliminate the 3% downpayment requirement, increase the loan limits, streamline condominium purchases, and eliminates the cap on Home Equity Conversion mortgages (HECMs).

On September 19, 2007, the Senate Banking Committee passed their own version of the bill called the "Building American Homeownership Act". The bill has not yet been introduced, but increases the FHA loan limits to 100% of area median, capped at 100% of the conforming loan limit; reduces the downpayment requirement to 1.5%, streamlines condominium purchases, and eliminates the cap on HECMs.

Also on September 19, the House of Representatives, by a vote of 312-110, passed the Terrorism Risk Insurance Revision Extension Act. The bill extends the terrorism risk insurance program for 15 years, phases in NBCR coverage (nuclear, biological, chemical radiological), and eliminates the distinction between foreign and domestic acts of terrorism. The legislation takes a comprehensive approach in ensuring the long term continued availability and affordability of terrorism coverage - often a vital component in financing commercial real estate. In addition, the legislation requires that Treasury prepare a report every two years on the pricing and availability of terrorism coverage, and also specifically port on its effect on commercial real estate. The legislation also establishes a blue ribbon commission, which would include a commercial real estate professional, to provide long term private market recommendations. The Senate is likely to consider similar legislation in the next couple weeks so stay tuned!

The year-end deadline for RPAC contributions to be received by NAR is October 18. Please be sure to get your contributions in and to follow up with any major investors that have not yet made their contribution to RPAC for the year.

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Terri Folk

Political Representative

National Association of Realtors

500 New Jersey Ave NW

Washington, DC 20001

202-383-7520 (direct)

202-257-5394 (cell)