Borrowers are hoping that Congress remembers which tax exemptions are naughty and which are nice during negotiations to avoid the fiscal cliff. For struggling borrowers, one exemption in particular is at the top of their wish lists: the exemption under the Mortgage Forgiveness Debt Relief Act that expires at the end of 2012.

Even in states like Louisiana, where the foreclosure crisis has been less traumatic, the act has helped countless homeowners. Before Congress passed the act in 2007, a homeowner who took advantage of a mortgage reduction program, for example, that resulted in a reduced principal, would have to pay income tax on the part of the loan that was cancelled.

Say a homeowner owed $250,000 on his mortgage in 2006. After an extended period of unemployment, he went to his lender and was able to restructure the loan. He then owed just $200,000 on the home, but the $50,000 difference would have been taxed as income. If he'd waited until 2007, the $50,000 would have been tax-exempt.

The act came with a sunset clause that retires the exemption at the end of this year. Should Congress fail to extend the law even through 2013, analysts say the door could slam shut on the slow but steady improvement in the housing market. Because the housing recovery is key to the overall economic recovery, the extension is more important than lawmakers may realize.

A handful of laws have been introduced in both the Senate and the House of Representatives, but none seems to have much momentum. Consumer advocates as well as real estate and mortgage professionals hope that any omnibus fiscal cliff bill will renew the act as a matter of course; they see no need for any changes to eligibility requirements.

Most involved are optimistic that something will pass. One policy analyst suggested that, if nothing else, the election gave notice to both parties that consumers are still struggling and that every little exemption helps.

Source: American Banker, "Mortgage Forgiveness Bill May Expire Unless Congress Acts in Lame Duck," Victoria Finkle, Nov. 21, 2012

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