Refi Info & Taxes

From Peter Viles' LA Land, the L.A. Times real estate blog:
A question about refinancing
This is one of those posts where we seek your wisdom and guidance, so pay attention, please.
We were reading the transcript of the President's news conference today, and noticed this quote: "...we need to change the tax laws. You're disadvantaged if you refinance your home. It creates a tax liability. And if we want people staying in their homes, then it seems like to me we got to change the tax code. That's why I talked to Senator Stabenow the other day and thanked her for her sponsorship of an important piece of tax legislation that will enable people to more likely stay in their homes."
Our first, knee-jerk response was this: The president is more clueless than ever -- There's no tax disadvantage in refinancing! What's he talking about? And doesn't he know that the Stabenow tax relief bill is not about keeping your house? It's about selling it at a loss and not owing income tax on the amount of your loan that is forgiven? This is about avoiding taxes on short sales; it's about selling your house, not keeping it.
But then we looked at the Stabenow proposal, and found that the President might be right. In some cases, it would help homeowners avoid owing taxes when they refinance -- in a scenario we haven't heard much about: "... if a family owns a home with a $100,000 mortgage and can’t afford to make their payments, the bank can step in and refinance the house at a lower value to better reflect the decreased market value. Under current law, if the bank values the home at $80,000, the family would have to pay taxes on the $20,000 difference between the new and the original mortgages."
I echo what Peter had to say. It is not well known (because it hasn't happened in years) that refi-ing for a lower rate (as if the banks will jump on this as a solution) creates a "debt forgiveness" for the homeowner.