Further relief for US homeowners

Mortgage debt relief is currently considered taxable income

A new law has been passed in the US designed to help homeowners avoid eviction by making it easier to refinance mortgages.

Signed earlier by President George W Bush, the legislation will ensure that reducing monthly home loan repayments does not result in a high tax bill.

The government is under pressure to prevent the downturn in the housing market from getting worse.

Mounting defaults on sub-prime loans has caused the US economy to suffer.

The law follows steps taken by the Bush administration earlier this month to help shield sub-prime borrowers - those on low incomes or with poor credit histories - from the pressures of rising mortgage repayments, which is feared could lead to a fresh wave of defaults.

When you're worried about making your payments, higher taxes are the last thing you need to worry about US President George W Bush

These measures included a five-year freeze on interest payments for sub-prime mortgages and the option of distressed homeowners to refinance their mortgage at a lower rate.

But under the current tax code, the amount forgiven as mortgage debt relief is subject to income tax, a hefty disincentive for borrowers to renegotiate their home loans.

Worries eased

The new law will allow US families a three-year window to secure lower mortgage repayments without having to pay taxes on the mortgage debt relief.

"When you're worried about making your payments, higher taxes are the last thing you need to worry about," Mr Bush said.

About 1.8 million homeowners took out loans with discount "teaser" rates this year and they will face much higher charges next year, which many could find unaffordable.

The worry is that higher mortgage rates will put an ever greater burden on the strained US consumer, causing spending to dry up, which in turn could tip the fragile US economy into a recession.

Earlier this week, the US Federal Reserve announced tough new rules to ensure lenders take into account a borrower's ability to repay a loan and preventing penalties on mortgage holders making early repayments.

The proposals, which will be subject to public consultation in the next few months, will come into force next year.