Members of the commission created by President Obama to shrink the federal budget deficit published a proposal this week that would significantly scale back the mortgage interest tax deduction.

The co-chairs of the National Commission on Fiscal Responsibility and Reform, Alan Simpson, a former Republican senator from Wyoming, and Erskine Bowles, who served as chief of staff under President Clinton, have outlined several recommendations.

Their first option would reduce the amount of mortgage interest payments homeowners can deduct from their federal taxes by 20 percent. Option two would limit the mortgage deduction to exclude second residences, home equity loans, and mortgages over $500,000.

The proposal has drawn immediate criticism from a number of industry groups who say now is not the time to wrench incentives from a housing industry struggling to get back on its feet.

“The mortgage interest deduction is one of the pillars of our national housing policy, and limiting its use will have

negative repercussions for consumers and home values up and down the housing chain,” Michael D. Berman, chairman of the Mortgage Bankers Association (MBA) said in a statement.

“We share the widespread concern over the growing national debt and want to help identify reasonable solutions, but we cannot support proposals that would chip away at the foundations of the real estate market,” Berman said.

Bob Jones, chairman of the National Association of Home Builders (NAHB) echoed Berman’s view.

“[F]for a battered housing industry … this is absolutely the worst time to be considering changes to the mortgage interest tax deduction,” Jones said.

Jones says tampering with the deduction would be a “major setback” for today’s slowly emerging housing recovery.

“It would disrupt the plans of young households who are gathering their financial resources to purchase a home. And it would impose a substantial tax burden on existing homebuyers, many of whom continue to stay current with their mortgage payments even as they struggle to make ends meet,” Jones argued.

According to Jones, the diminished tax deduction would exert further downward pressure on home prices, leaving more homeowners with mortgages larger than the value of their property and fueling even more foreclosures.

The preliminary proposal put forth by Simpson and Bowles is labeled “draft.” It requires approval from 14 of the 18 members of the commission in order to make it to Congress for consideration. The commission says it plans to submit its final recommendations to lawmakers by December 1.