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Key House Panel Backs Measure Allowing Judges to Modify Mortgages

By Renae Merle
Washington Post Staff Writer
Wednesday, January 28, 2009

A measure allowing bankruptcy judges to modify the mortgages of troubled homeowners, including cutting the principal they owe, cleared a key congressional committee yesterday.

Under legislation passed by the House Judiciary Committee, a bankruptcy judge could change the terms of a loan by reducing its interest rate, extending its length, or lowering the principal or loan balance. These are known as "cramdown" provisions.

"While bankruptcy reform may not provide all of the answers to this crisis, surely it provides a common sense and practical approach to helping stop the spiral of home foreclosures, which are not helping anyone," committee Chairman Rep. John Conyers Jr. (D-Mich.) said.

Debate on the measure fell mostly along partisan lines with several Republican amendments proposed to curb the impact of the bill, including limiting it to subprime mortgages or other types of risky loans. That amendment failed.

The committee agreed that if a judge lowered the principal owed, the homeowner would have to share the profit from any sale of the property with their lender. The panel also approved a Republican amendment excluding people who have committed mortgage fraud from receiving such modifications.

But there were fewer amendments than expected, and the bill passed 21 to 15.

Similar measures have stalled for years, but the change to bankruptcy law is gaining traction. House Speaker Nancy Pelosi (D-Calif.) and President Obama have pushed for it. Its proponents received another boost when Citigroup announced its support this month.

Democrats have backed off efforts to include the provision in the economic stimulus package that's making its way through Congress. Now supporters are weighing other vehicles that would move the cramdown legislation quickly, while it also makes its way through the House as a standalone bill.

Banking executives privately acknowledge that some type of legislation is likely to pass and are arguing that its scope should be limited. "The fraud amendment is a positive step, but more needs to be done to limit the ability to abuse the bill," said Scott E. Talbott, a senior vice president of government affairs for the Financial Services Roundtable, an industry group.

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