By Diana Olick, CNBC Correspondent NEW YORK ( CNBC) -- The housing market is on firmer ground today, as two major tax provisions survived the "fiscal cliff." Congress did not touch the mortgage interest deduction, and it extended tax relief for one year on mortgage debt forgiveness. "An extension of the tax break is positive for home values by reducing the number of foreclosures and helping more troubled borrowers stay in their homes," wrote Jaret Seiberg of Guggenheim Partners. "That means less supply on the market." Under a law signed in 2007, debt relief on loan modifications, short sales, and foreclosures were no longer taxable; that break expired at the end of 2012. The fear was that if the tax break was not extended, home owners would not agree to short sales (when the home is sold for less than the value of the mortgage) because they would then face a tax bill. They would also not agree to principal reduction loan modifications, which have proven to be far more successful than other modifications that leave the principal balance as is. Under the $25 billion mortgage servicing settlement, borrowers have received $6.3 billion in mortgage principal relief through September, according to the settlement's monitor, Joseph A. Smith, Jr. The average loan balance reduction, $150,000. Banks completed 13,351 principal reduction loan modifications in November alone, according to Amherst Securities Group, a 62% jump from September.
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"We expect a gradual and progressive contraction in the shadow inventory in 2013 as investors continue to snap up foreclosed and REO properties and the broader recovery in housing market fundamentals takes hold," said Anand Nallathambi, president and CEO of CoreLogic in a release. That would not have been the case, had tax relief on debt forgiveness in short sales and principal reduction modifications come to an end. --Written by Diana Olick at CNBC