House Delays Vote on Modification of Delinquent Mortgages

By Renae Merle
Washington Post Staff Writer
Thursday, February 26, 2009; 4:50 PM

The House delayed a vote on legislation to allow bankruptcy judges to modify the mortgages of troubled homeowners after the measure faced unexpected opposition from some Democrats.

Under the provision, a bankruptcy judge would be able to cut the principal on a homeowner's mortgage, lower the interest rate and extend the terms, provisions known as "cramdowns." Judges are already allowed to modify mortgages for vacation or second homes but not for a borrower's primary residence.

The measure is fiercely opposed by Republicans and the financial services industry, which complain that it would drive up their losses and force mortgage rate increases. But today it was moderate Democrats who questioned the proposal. Some raised concerns that efforts to modify a borrower's loan should take precedence over bankruptcy when a homeowner is struggling, congressional aides said.

"This bill has been fraught with political peril. Members on both side and in both bodies have concerns with the bill and that was evidenced today," said Scott E. Talbott, a senior vice president of government affairs at the Financial Services Roundtable, an industry group.

House Speaker Nancy Pelosi (D-Calif.) said Democrats will meet with Housing and Urban Development Secretary Shaun Donovan on Monday to discuss the measure.

Donovan told the Senate banking committee yesterday that judicial modifications should be a last resort for troubled homeowners -- an argument often made by the financial services industry. "Carefully tailored bankruptcy reform is a piece of the solution," he said. "Well before we get to bankruptcy court in foreclosure, it's critical that we modify these loans in significant numbers. . . . We completely agree that bankruptcy court should not be the place where millions of loans are worked out."

Donovan also said among the potential ideas under consideration is a provision that says that lenders that make a good-faith effort to modify the terms of a borrower's loan won't later have to face a cramdown.

The provision is a key part of a housing package being put together by Congress to codify changes to housing policy called for by President Obama.

Lawmakers could vote on the housing package as soon as Tuesday, according to Democratic leaders.

"The reason that President Obama included bankruptcy in his housing plan . . . is that it has become clear that the banks simply will not help address the housing crisis unless they believe that they must do so if they want to avoid judges making these changes for them," said Sen. Richard Durbin (D-Ill.), who has pushed for the change in the bankruptcy code for years.

Staff writer Dina ElBoghdady and researcher Magda Jean-Louis contributed to this report.

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