Suze Orman Money Matters

If you were busy with holiday travels and shopping in late December, you might have missed the fact that President Bush signed into law new legislation designed to help homeowners in deep mortgage trouble.

Forgiven, Not Forgotten

The most significant change under the new law is tax relief for people who sell their home for less than the remaining balance on their mortgage. Under the old law, even if the lender agreed to "forgive" the difference between the home sale price and the mortgage balance, the IRS wasn't so lenient. Tax regulations required lenders to report the amount that was forgiven as gross income received by the seller, in effect handing sellers a tax bill on income they never actually received.

For example, if you sold your home for $200,000 but your remaining mortgage balance was $225,000, you would've faced a tax bill on the $25,000 difference that your lender forgave.

With the new legislation, that tax has been eliminated until Jan. 1, 2010. So at the very least, if you're forced to sell a home you can no longer afford, and your lender agrees to forgive any unpaid mortgage balance, you no longer have to worry about a hefty tax bill as well. (This tax break is retroactive to Jan. 1, 2007.)

Other Good News

There was also a small bit of good news for homeowners with private mortgage insurance (PMI): Congress voted to extend the deductibility of PMI premiums until Jan. 1, 2010.

Only homeowners with adjusted gross incomes below $100,000 are eligible for a full deduction (it phases out between $100,000 and $110,000), and only mortgages for primary residences originated after 2006 are eligible. A PMI trade association estimates this tax break will result in an average $350 annual savings for homeowners eligible for the deduction.

The final bit of housing-related legislation provides tax relief for surviving spouses. If a surviving spouse opts to sell a primary residence within two years of the death of the other spouse, the surviving spouse is eligible for a $500,000 capital gains exclusion, rather than the old $250,000 exclusion that applies to individuals.

Hope for Some

In addition to these new laws, Washington is also busy pushing a voluntary relief program for the mortgage-stressed. The HOPE NOW alliance, which features Treasury secretary Henry Paulson as a lead flag bearer, announced a plan in early December that should be up and running soon. The plan allows some subprime mortgage holders to refinance, or lets them lock in their current interest rate for five more years -- a deal that has been dubbed a "tease freeze."

I know the issue of mortgage assistance isn't necessarily popular with many of you. A December 2007 CNN poll reported that 51 percent of respondents were in favor of "special treatment" for homeowners facing default and foreclosure, while 46 percent were against any special treatment. Those of you facing a big mortgage reset are obviously in the pro-HOPE NOW camp.

But before you breathe a sigh of relief, you need to understand the severe limitations of the plan. First, it's voluntary, meaning lenders are encouraged to offer the relief programs but not required. In fact, the plan comes not straight from the White House or Treasury Department, but from the American Securitization Forum, a consortium of money managers (read: hedge funds and Wall Street firms sitting with the distressed debt), as well as all sorts of mortgage lenders and servicers.

You don't need to be a rocket scientist to realize that the group's primary motivation is to help investors holding the mortgage debt, not the actual homeowners with the exploding mortgages. Moreover, the eligibility rules will make it tough for many people to quality for help. In fact, the Center for Responsible Lending estimates that the president's plan being pushed by Secretary Paulson could help less than 10 percent of subprime borrowers.

Five-Year-Freeze Facts

The full rundown of the HOPE NOW plan is available here, but here are the major points that determine if you're eligible for a five-year freeze:

• If your mortgage has already reset, you're out of luck.

• Only adjustable rate mortgages made between Jan. 1, 2005, and July 31, 2007, are eligible. (Option-only loans aren't eligible.)

• You're also out of luck if your lender happened to keep the loan on his books rather than sell it into a securitization pool -- only securitized loans are eligible for this plan. Is there better proof that this effort isn't so much about bailing out homeowners as bailing out investors?

• Finally, your interest rate must reset between Jan. 1, 2008, and July 31, 2010, and the new payment must be at least 10 percent higher than your current payment.

Meet all the above criteria and get your restructure rolling before the initial reset and you may be in luck. But keep reading:

• Only subprime adjustable rate mortgages are eligible. What qualifies as subprime? Well, the quick test is that you must have a FICO credit score below 660. If you have a higher score, the lender will look at your income to determine eligibility.

The theory behind limiting the freeze option to homeowners with low FICO scores is that borrowers with higher FICO scores should be able to refinance. At least that's the theory for now; recently, Secretary Paulson has noted that more prime borrowers are falling behind on their mortgage payments.

• You better be up to date with your mortgage payments. If you're currently more than 30 days behind on a payment, or if you've been 60 days late more than once in the past 12 months, you won't qualify for the 5-year freeze program.

A Potential Security Blanket

FHASecure, launched in the summer of 2007, is another government push to help the mortgage-stressed. The crux of this program is to make it easier for borrowers hit with resets to refinance.

The program is extended to homeowners whose mortgages reset between June 2005 and December 2009. To qualify, you must have been on-time with your payments prior to the reset, have at least 3 percent equity in your home, and have a solid employment history and the ability to afford mortgage payments on a refinanced loan. You can learn more here.