Fiscal cliff deal expected to help Central Valley's housing market recovery

SACRAMENTO -- Besides preserving middle-class income tax cuts and extending jobless benefits, this week's fiscal cliff deal contained provisions aimed at maintaining the housing recovery that is slowly taking shape in Modesto and other distressed markets.

Congress reinstated a federal tax deduction for mortgage insurance. It extended tax breaks for those who have mortgage debt erased through short sales and loan modifications. And it left intact the mortgage-interest deduction Americans hold dear.

Northern California real estate leaders said the provisions would help the region's real estate market continue its comeback. The importance of the continued housing recovery was not lost on the politicians who passed the deal to avert the cliff, said Kris Vogt, president of Coldwell Banker for the Sacramento-Tahoe region.

"One of the things we've learned as a country in the last five to seven years with the mortgage crisis and the housing meltdown is the ripple effect that housing has on our overall economy," Vogt said.

Jobs and consumer spending depend on the real estate market continuing its rebound, Vogt added. "Housing led us into this economy. It's now clear that housing is going to lead us out."

The provisions Congress passed Tuesday include a one-year extension of the tax break for those who have lenders forgive part of their mortgage debt.

In a short sale, for instance, a lender accepts less than what's owed. The amount of principal the homeowner doesn't pay generally is considered taxable income under state and federal law. A bill from the IRS for $100,000 or $200,000 in forgiven debt would be substantial.

The exemption will have less impact in California than in other states, but is vital, experts said.

That's because in California, many primary home loans are "nonrecourse" loans, meaning once a lender forgives the debt, they have no recourse to come after the borrower for the rest. In that case, the amount isn't deemed a taxable windfall.

But many refinanced mortgages and second mortgages give lenders the right to take further legal action against a borrower who doesn't pay off the loan in full. The exemption, therefore, continues to affect many borrowers.

"It's huge," said Gina Borges- Valdez, a Sacramento real estate agent who specializes in short sales. Before the fiscal cliff deal, she said, "all of my clients were calling and panicking. They were worrying, 'How can I afford to pay my tax liability?' "

A boon for entire market

The extension is a boon not just for individual homeowners but for the market as a whole.

Short sales, once a rarity, have become increasingly common in the housing crisis, as many homeowners owe far more than their homes are worth. The sales represent about a third of the housing market.

Homes sold through short sales fetch more than foreclosures, cost lenders less and do less damage to borrowers' credit scores.

If they had to pay thousands of dollars in taxes after a short sale, many homeowners might choose to walk away, said Dustin Hobbs, of the California Mortgage Bankers Association.

The exemption, "encourages borrowers to stick it out and go through the process of a short sale or loan modification," Hobbs said.

A state bill to enact similar changes has been introduced by Sen. Ron Calderon, D-Montebello.

Another federal provision to give homeowners a tax break was the reinstatement of a deduction for those who pay personal mortgage insurance, which expired a year ago. That's typically the case with borrowers who have less than a 20 percent down payment.

They include those who have loans backed by the Federal Housing Administration. FHA loans require only a 3.5 percent down payment but ask that borrowers carry mortgage insurance for five years.

The insurance costs about $200 a month for a $200,000 loan. Making it deductible could save middle- income homeowners hundreds of dollars a year.

"For borrowers stretching to buy a home, this certainly reduces their tax burden and frees up a little more cash," Hobbs said.

Congress left alone the deduction for mortgage interest — considered one of the major benefits of homeownership. There was talk of doing away with it last year, but observers said it was not seriously on the table as the fiscal cliff negotiations reached their zenith toward New Year's Day.