President Obama signed a bill passed by the Senate and House on Tuesday that shields troubled borrowers from being penalized under the tax code when they agreed to a short sale or principal reduction transaction.
The bill raises taxes on families earning more than $450,000. It cleared the House by a 257-167 vote late Tuesday night and was sent to the White House for the president’s signature.
The Senate crafted the bill to avoid the fiscal cliff and passed it early Tuesday morning by an 89-8 vote. The bill includes another tax provision that allows borrowers to deduct the cost of their mortgage insurance premiums.
As passed, the bill to extends the Mortgage Debt Forgiveness Relief Act and the MI deduction for one year. Both tax provisions technically expired Jan. 1.
Industry groups have been concerned that expiration of the debt forgiveness provision would force more distressed borrowers to choose foreclosure over a short sale. The extension will allow borrowers to complete a short sale and escape paying income taxes on the amount of mortgage debt forgiven.
There are currently 36,000 to 38,000 short sales completed each month.
The $25 billion national mortgage foreclosure settlement also incentivizes servicers to employ principal reduction modifications. The average principal reduction in those settlement modifications is over $100,000.