If President Bush, per his speech this morning, is able to push through a change in the IRS Code which even temporarily eliminates the taxes on the forgiveness of debt for financially desperate homeowners, it will be a good thing for just about everyone. (While this is not a huge problem in the Annapolis Real Estate or Washington Suburban Real Estate Market where we are located, the general fall out from the current credit squeeze has and will continue to affect us for sometime.)
One of the highest barriers to relief for those facing foreclosure today is the forced recognition of income to the homeowner for forgiveness of debt. This creates problems for borrowers who are over-leveraged on their house and unable to make their mortgage payments whether as a result of unwisely loading the property up with debt via refinancing, ARM's ratcheting up, or having bought at the top of the market and having suffered some subsequent financial calamity. 
In a short sale, where the borrower accepts less than the value of their secured loan on a house, the homeowner/seller will be issued a 1099 by the lender, assuming the lender hasn't decided to pursue a deficiency judgment, which must be filed with the homeowner/seller's tax return recognizing as income, the difference between what the homeowner owed on his/her mortgage and the amount the lender accepts in the short sale.
The obvious primary beneficiary of elimination of this tax will be the individual homeowner who will no longer have the tax consequence hanging over his head. The defaulting borrower will have to only deal with the loss of the home (as if it weren't enough) and not have to worry about the IRS coming after them for years to come, possibly making it impossible for the borrower to ever recover financially.
Other homeowners will ultimately benefit by the "market clearing" effect of removing homes from extended default or foreclosure.
Lenders, who need to recognize the losses they have been avoiding recognizing by keeping many homes in an ongoing default status rather than foreclosing, will have a clearer path to disposition of the properties, along with the defaulting mortgages securing them.
The end result will more likely be a sale of the property prior to foreclosure, keeping the lenders out of the real estate business and enabling many desperate homeowners from going through a sale of their property on the courthouse steps.
Real Estate is a business Lenders don't want to be in and don't do particularly well in. (In case you haven't noticed, lenders tend to overprice and poorly maintain properties (OREO) they wind up buying back in foreclosure.)
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