Mortgage industry fares well, debt forgiveness law survives

The housing market is on firmer ground today, as two major tax provisions survived the "fiscal cliff." Congress did not touch the mortgage interest deduction, and it extended tax relief for one year on mortgage debt forgiveness. Before a deal was reached yesterday, analysts warned that allowing the debt-forgiveness break to expire could hit a recovering housing market.

Extending the tax break had bipartisan support, as well as support from both the financial-services community and consumer advocates. "An extension of the tax break is positive for home values by reducing the number of foreclosures and helping more troubled borrowers stay in their homes," wrote Jaret Seiberg of Guggenheim Partners. "That means less supply on the market."

Estimates are that 77 percent of American households will face higher federal taxes in 2013 under the negotiated agreement, according to the Tax Policy Center, a nonpartisan Washington research group. High-income families will feel the biggest tax increases, but many middle- and low-income families will pay higher taxes too. However, the fiscal cliff deal does maintain tax help for struggling homeowners.

One of the more watched provisions of the fiscal cliff was the Mortgage Forgiveness Debt Relief Act of 2007, which enabled struggling homeowners to avoid paying taxes on forgiven mortgage debt from short sales or loan modifications. Signed into law by President Bush, it was set to expire on December 31st. The tax break now has been extended through 2013.

The fear was that if the Mortgage Forgiveness Debt Relief Act was not extended, home owners would not agree to short sales because they would then face a tax bill. They would also not agree to principal reduction loan modifications, which have proven to be far more successful than other modifications that leave the principal balance as is.

The fiscal cliff deal also allows borrowers to deduct the amount they pay for private mortgage insurance, which has become increasingly prevalent in today's tighter mortgage market.

All of the above will help to lower the number of foreclosures and support the slow rise in home prices. That would not have been the case, had tax relief on debt forgiveness in short sales and principal reduction modifications come to an end.