It’s not often that the homeowner advocates at the Center for Responsible Lending and the bank lobbyists at the Financial Services Roundtable agree on anything. But they’re teaming up on urging Congress to extend the Mortgage Forgiveness Debt Relief Act, which would continue the foreclosure crisis-era policy of forgiving payment of taxes on debt forgiveness like a principal reduction or a short sale.

In letters to the Senate Finance Committee and the House Ways and Means Committee, which have jurisdiction over tax law, CRL and the FSR describe the debt relief law as “critical to helping homeowners and communities struggling with the ongoing foreclosure crisis.” They also note that failing to extend the law would threaten a housing recovery.

As I’ve been writing, if Congress fails to extend the MFDRA, come January 1, every homeowner receiving debt relief on their mortgages, through either principal forgiveness or short sale, would see that forgiven debt count as earned income for tax purposes. Borrowers could plead tax insolvency to exempt themselves from the tax liability, but that’s a bruising process. The resulting tax liability would make borrowers extremely unlikely to accept the terms of any debt forgiveness, as it would cost them too much on the back end. Struggling homeowners don’t typically have $50,000 lying around to pay the federal government after getting a break on the principal balance on their home.

The Financial Services Roundtable, now under the direction of Tim Pawlenty, likes the law because it facilitates those short sales, which have been booming of late. Short sales are one of several housing policies that are actually beneficial for all sides. The homeowner doesn’t go through foreclosure and gets to sell their home without incurring a debt as they otherwise would; the bank gets a higher price for the home than it would if it fell into foreclosure, and a more streamlined process where they never have to take ownership. Principal reduction happens to be beneficial for all sides as well relative to foreclosure, but banks have resisted it because it represents a bigger loss for them. Still, failure to extend the MFDRA would have the effect of stalling out BOTH of these options.

As for the foreclosure fraud settlement in place that mandates debt forgiveness up to a certain level, this expiration would effectively cancel it. The borrower would owe so much in taxes, they would never assent to taking the debt relief.

The Senate Finance Committee passed a one-year extension as part of a larger “tax extenders” bill, but despite bipartisan support, they have not been able to move that bill to the floor, and it has similarly gone nowhere in the House. And time is running out. Having the Financial Services Roundtable on board with what is a priority for homeowner advocates makes passage slightly more likely, but if you know anything about the 112th Congress, you wouldn’t use the word “likely” about anything.