THE CLOCK IS RUNNING OUT FOR THE MORTAGAGE DEBT FORGIVENESS ACT!

Given the huge public and private resources now being devoted to helping financially distressed homeowners,including the recently announced $25 billion settlement from the 5 largest banks, you might assume that a key Federal tax law benefit underpinning these efforts would be a shoo-in for renewal. But it's not.

The Mortgage Forgiveness Debt Relief act is set to expire in 10 months, and there are early indications on Capitol Hill that it might not make the cut. The law enacted in 2007, allows homeowners who have received loan modifications,short sales or foreclosures to avoid income taxation on the amount forgiven.

Loss of that tax help would endanger huge numbers of distressed mortgage arrangements in the months ahead.

Yet, election year politics and a Congress loaded down with tax and budget issues could doom renewal of the
act and put large numbers of loan modification participants deeply in the hole.

Republican strategists say the cost of continuing the program --$2.7 billion over 2 years, is substantial enough to catch the eye of budget deficit hawks. Some tea party members consider this to be a tax code "bailout"

A spokesman said, "it's going to be an uphill fight to get an extension of the act through Congress."

Real Estate and housing groups are gearing up campaigns to save the act before the November elections. Some strategists put an extension of the act at 50-50.

Under the present law, a homeowner can avoid taxation on forgiven mortgage amounts up to $2 million for married taxpayers and $1 million for single ones.

Picture this scenario -- After a long negotiation with your lenders, you pull together a short sale package calling for the bank to forgive $100,000. But the deal doesn't go into closing until after the December 31 expiration date. Now your house is gone, your credit is shot, you are looking for a place to rent, and the IRS demands taxes on your phantom"gain" on the $100,000 on the sale.