By Renae Merle
Washington Post Staff Writer
Wednesday, February 25, 2009

More than one million distressed homeowners could benefit from filing for bankruptcy under proposed legislation allowing bankruptcy judges to modify mortgages on primary residences, according to the Congressional Budget Office.

The CBO estimated that of the million, about 350,000 homeowners would take advantage of the proposed change by filing for bankruptcy during the next 10 years. But the report said, "The number of additional bankruptcy filings that would occur under the bill is, however, very uncertain."

The House is expected to take up a housing package Thursday that would include a provision allowing bankruptcy judges to modify such mortgages, including lowering the principal owed on loans.

The change is fiercely opposed by the financial services industry, which complains that it would drive up their losses and force mortgage rate increases. Industry officials also said yesterday that they were concerned that the House bill does not include restrictions on the measure advocated by President Obama last week, including a cap on the value of mortgages available for modification. They have been pushing to limit the impact of the legislation.

"Judicial modification should be a last resort and only available where other non-judicial options have been exhausted or are not available," the Mortgage Bankers Association said in a letter to Treasury Secretary Timothy F. Geithner and Shaun Donovan, secretary of the Department of Housing and Urban Development.

Supporters say the measure would encourage lenders themselves to more aggressively modify the mortgages of troubled homeowners rather than allow bankruptcy judges to set the new terms. Credit Suisse has estimated that the measure would lower foreclosures by 20 percent.

Even without the legislation, the CBO estimated that Chapter 13 bankruptcy filings, which restructure consumers' debt, will continue to increase. After growing 14 percent in 2008, filings will increase 13 percent this year, the CBO said. It said that 96 percent of those who file for Chapter 13 are homeowners.