Legislation temporarily waiving income tax liability for borrowers who have been foreclosed on is now law.

President Bush today signed H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007.

The bill was passed by the House Tuesday and approved by the Senate last week.

The new law "will protect families from higher taxes when they refinance their homes," President Bush said today in a statement issued by the White House.

"In recent months, our nation's housing market has faced serious strains," the statement said. "At the same time, many homeowners with adjustable-rate mortgages have seen their monthly payments increase faster than their ability to pay."

Bush explained that under current tax law, any mortgage balance forgiven by a lender becomes taxable. But the new law creates a three-year window for borrowers to escape tax liability. He noted the legislation increases the incentive for borrowers and lenders to work together.

Another provision of the new law extends the tax deductibility of private mortgage insurance from 2007 to 2010 for families with adjusted gross income of $100,000 or less.

"Continuing this tax deduction will help low- and moderate- income consumers, particularly first-time home buyers who are unable to put down 20 percent," Kevin Schneider, president of the Mortgage Insurance Companies of America said in a statement today. "On average, the annual tax break could be worth $350 per taxpayer."

Bush went on to tout the accomplishments of his administration in dealing with the mortgage crisis, including a deal brokered by Treasury Secretary Henry Paulson that will enable servicers to freeze interest rates for some adjustable-rate subprime borrowers for five years and an expansion of the capabilities of the Federal Housing Administration to help some subprime borrowers.

The president called on Congress to pass legislation permitting state and local governments to issue tax-exempt bonds for refinancing existing home loans and to complete work on FHA modernization legislation.

"It's a really good piece of legislation," he said. "It will help hardworking Americans take steps to avoid foreclosure during a period of uncertainty in the housing market."


Related:

Debt Forgiveness Bill Approved
Congress has approved legislation that would waive tax liability for borrowers whose mortgage balance is reduced through foreclosure or loan modification.