WASHINGTON — Industry groups and consumer advocates have joined forces to urge lawmakers to extend the Mortgage Forgiveness Debt Relief Act, warning that expiration of the 2007 law could hamper the housing recovery.

The Financial Services Roundtable, the Housing Policy Council and the Center for Responsible Lending wrote to leaders of the Senate Finance and House Ways and Means committees in a letter Wednesday asking that the law be extended before the end of the year. The law exempts homeowners from paying taxes on short sales, principal reductions and other forms of mortgage debt forgiveness.

"This tax law has bipartisan support and is critical to helping homeowners and communities struggling with the ongoing foreclosure crisis. Furthermore, the housing market is beginning to show signs of a recovery, and expiration of this law would threaten that recovery," the letter says.

The groups don't specify how long an extension of the law should last. Standalone bills extending the law for one or more years have not made it out of committee in either chamber, though the Senate Finance Committee did pass a more comprehensive bill that contained a one-year extension earlier this year. That bill, the Family and Business Tax Cut Certainty Act of 2012, hasn't yet had a vote on the Senate floor.

Earlier this month, the National Association of Attorneys General also wrote to leaders in the House and Senate pushing for an extension of the tax provision because of its implications for the $25 billion mortgage servicer settlement signed in February. The top five largest mortgage servicers agreed as part of the settlement with state attorneys general to pay $17 billion in debt reduction and other relief to struggling borrowers.

"Requiring a homeowner to pay income tax on forgiven or canceled mortgage debt would make the National Mortgage Settlement much less effective," the Nov. 20 letter warns.

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