Homeowner Rescue Bill Passes House
Measure Would Let Bankruptcy Judges Modify Mortgages

By Renae Merle
Washington Post Staff Writer
Friday, March 6, 2009

The House yesterday passed legislation that would allow bankruptcy judges to modify the terms of troubled home mortgages, overcoming fierce opposition from the financial industry.

The bill, a package of housing-related initiatives, passed 234 to 191, largely along party lines. It now heads to the Senate, where it will face a tougher fight but has the backing of some powerful members.

Under the legislation, bankruptcy judges could cut the principal on a homeowner's mortgage as well as reduce the interest rate and extend the terms -- provisions known as cramdowns.

"I wish we had done this a year and a half ago," said Rep. Brad Miller (D-N.C.), who had sponsored a version of the bill. "If we had, we would be much further along in getting a handle on the foreclosure crisis."

The housing package is a key part of President Obama's $75 billion foreclosure prevention plan, launched Wednesday, that includes initiatives to pay lenders to make troubled mortgages more affordable. The legislation also makes changes to Hope for Homeowners, a government program to refinance distressed loans that so far has failed to gain traction.

The measure was opposed by banks, which have argued for years that it would drive up their losses and that homeowners would flood bankruptcy courts looking for relief. The Congressional Budget Office has estimated that the change would increase bankruptcy filings by about 350,000 in the next 10 years.

This year, the measure also faced opposition from moderate Democrats who forced concessions that require, among other things, a homeowner to share with the lender any profit from the eventual sale of the home if a judge lowers the principal balance. The compromise version also gives preference to reducing a homeowner's interest rate over cutting the principal balance.

"We are pleased that the House moved to limit the harm this bill will do to consumers, and we want to work with the Senate to further contain the damage," David G. Kittle, chairman of the Mortgage Bankers Association, an industry group, said in a statement.

The administration has called the cramdown provision the stick that lenders will face if they do not do enough to help troubled homeowners. Credit Suisse has estimated that the change could cut foreclosures by 20 percent.

Under current bankruptcy law, a judge can modify mortgage terms for second homes but not for primary residences. In those cases, bankruptcy could delay a foreclosure but not stop it.

"It is only fair that we offer average families the same alternative to foreclosure that has been available under the law for many years to owners of vacation homes, investment properties, private jets and luxury yachts," said House Judiciary Committee Chairman John Conyers Jr. (D-Mich.), who helped push the legislation through the House. While "some mortgage lenders will not get every penny now owed to them on the mortgage paper they hold, on balance they are going to get a lot more than if these families have no other choice than to fall into foreclosure."

Sharan Powers and her husband tried to use the bankruptcy process to save their Fairfax home last year. The couple fell behind on their payments after her husband's salary dropped because of declining demand for the copiers and fax machines he sells.

Their lender agreed to modify their loan, but the payments increased by $200 a month and they soon fell behind again, Powers said. The lender encouraged them to sell their home, Powers said, but prices had fallen and the home was worth at least $50,000 less than the $600,000 mortgage.

Powers said she and her husband eventually filed for bankruptcy protection. "The whole goal of bankruptcy was to rid ourselves of the credit card debt so we could qualify to keep our house," she said.

By the time they emerged from bankruptcy protection late last year, $45,000 in late fees and missed payments had built up on their mortgage, Powers said. "The old payments accumulated so much we no longer qualified" for a modification, she said.

The legislation comes as evidence of the country's foreclosure crisis is growing, with more than 11 percent of home mortgages now in some form of distress, according to a survey released yesterday by the Mortgage Bankers Association. About 7.9 percent of mortgage loans were delinquent during fourth quarter, compared with 5.8 percent a year earlier. An additional 3.3 percent were in the foreclosure process, up from 2 percent a year ago. Both figures set records. The association began keeping records in 1972.

Increasingly, homeowners are becoming delinquent after losing a job rather than because they are struggling with a risky loan, the Mortgage Bankers Association and analysts said. Falling home prices are exacerbating the problem, they said.

At the current pace, nearly 2,900 families are losing their homes each day, according to a report scheduled to be released today by the congressional oversight panel established to oversee the Troubled Assets Relief Program. "Loan modification efforts to date have been insufficient to halt the downward spiral in housing," the report said.

The report concluded that bankruptcy modification alone would not solve the foreclosure crisis but could change the balance in negotiations that distressed homeowners have with their lenders. "A homeowner who could credibly threaten to file for bankruptcy might find that servicers were more responsive and that lenders were more willing to make modifications available," the report said.

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