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The Fiscal Cliff Deal: Making Mortgage Writedowns Possible

Tucked away in the pages of the tax bill that averted the Fiscal Cliff (which Aleta Sprague reviewed here) is a crucial lifeline to struggling homeowners. Known as the Mortgage Debt Relief Act,  thousands of homeowners who go through a mortgage modification, short sale, or foreclosure correction will not owe federal taxes on that debt forgiveness. This is a big deal. In 2007, this bill was passed with bi-partisan leadership and support. In the trenches, housing counselors are quick to point out that homeowners understand the net effect of a mortgage modification and will walk away from a deal that punishes them for not going into foreclosure. For instance, a Cleveland homeowner with a mortgage of $140,000 received principal correction on her home, matching it to neighborhood vacant and distressed homes to near $50,000. Without the Mortgage Debt Relief Act, she would owe federal taxes on $90,000 of debt relief – money she never saw. This provision helps keep people in their homes but also for those in a short sale situation, it does a lot to move homes through the real estate market.

I’m no Nate Silver, but the only time that I heard either presidential candidate discuss housing and foreclosure issues was when the President appeared on the Tonight Show late in the campaign. Not good enough. Nearly 1 in 4 homes with a mortgage are still underwater; owing more than their home is worth. The Fiscal Cliff is behind us and the debt ceiling and sequester loom ahead, but will there come a time when Washington takes more aggressive action to address the on-going housing crisis? Housing remains the largest, sometimes the only, asset for families. While allowing families to accept rare offers of principal correction and promoting short sales through Mortgage Debt Relief is an important step, it’s not enough. It is time to expand principal correction to federally backed mortgages and make housing policy a real priority.