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Ignored Element in Fiscal Cliff Solution: Mortgages

NEW YORK (TheStreet) -- Can mortgage write-offs wind up being a big part of the "fiscal cliff" solution? And can actual mortgage write-downs, in which banks and mortgage lenders "write-down" 10% to 20% of an underwater homeowner's mortgage and reduce home mortgage debt burden, be in play too?

Congress isn't exactly saying "yes," although fresh developments indicate the idea of continued mortgage write-offs is at least on the negotiating table.

Mortgage write-offs differ from write-downs in that they originate from the federal government and involve a significant tax break on home loan modifications; mortgage write-downs are largely at the discretion of the mortgage lenders and have little direct involvement from Uncle Sam.

Homeowners threatened with high debt burdens would no doubt like to see both options on the table, but may wind up with just one.

Bloomberg is reporting that Congress is mulling the extension of a $1.3 trillion federal tax break that helps homeowners keep their homes with a dose of mortgage principal write-offs.

Federal funding for mortgage principal write-offs is due to disappear on Dec. 31. The funding originated with the Mortgage Debt Relief Act of 2007, allowing struggling homeowners to avoid paying federal taxes on any residential mortgage principal that was forgiven by lenders as part of a home loan modification.

If the legislation is allowed to expire, that could sink many U.S. homeowners, who would likely be saddled with a huge bill from the IRS on taxes owned from mortgage loan forgiveness amounts.

Nothing is etched in stone, but there is support from both sides of the political aisle to extend the mortgage tax write-offs, likely as past of any "fiscal cliff" deal Congress and the White House may broker.

As for mortgage write-downs, the outlook isn't as positive, as President Barack Obama and Congress haven't taken any formal steps to put mortgage principal on the docket. There's not much the federal government can do to force banks to streamline mortgage write-downs, but they are taking some steps.

For example, the government, via the U.S. Treasury Department, has tripled the amount of financial incentives it is offering financial institutions to 63 cents on the dollar. And Uncle Sam has convinced the top mortgage lenders to slice $10 billion in mortgage forgiveness debt for underwater homeowners as part of the $25 billion foreclosure deal cut between all 50 state attorney generals and the largest banks and mortgage lenders.

But that isn't enough for mortgage relief advocates, who say both parties can and should do more.

"What is astonishing is how the dickering [in Washington] ignores mortgage debt overhang and infrastructure decay -- by far the principal impediments to restored economic and fiscal health since 2007," says Robert C. Hockett, an international law professor at Cornell University. "Eliminating mortgage debt through serious principal write-downs, and reversing infrastructure decay through serious investment conducted through public-private partnership banks, would between them do far more to boost growth, employment and consequent federal revenue than will anything under discussion right now. Indeed, between the two of them they'd render all 'fiscal cliff' talk unnecessary."

That's likely wishful thinking on Hockett's part, but at least mortgage write-offs are on the table. Mortgage write-downs can't, apparently, get in the door.

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