Senate Fiscal Cliff Bill Deal Helps Distressed Borrowers and MIs

Mortgage & Real Estate

Early Tuesday morning the Senate passed a fiscal cliff deal by an 89-8 vote that includes of two key tax provisions that are important to the mortgage industry. 

The first provision shields troubled borrowers who benefit via a short sale or principal reduction transaction from being penalized under the tax code.  The second provision allows borrowers to deduct the cost of their mortgage insurance premiums.

The Senate bill now goes to the House for further action 

The Senate-passed bill extends the Mortgage Debt Forgiveness Relief Act and the MI deduction for one year.  Both tax provisions technically expired January 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.

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