Senate Democrats Seek Support For Mortgage Modification Bill

Key Democratic lawmakers are courting support from the financial services industry, including credit unions, for legislation that would allow bankruptcy judges to modify mortgages.

The provision passed the House last week but has not been scheduled for a Senate vote. The Senate had been expected to take up the bill as soon as this week, but it now could be delayed a few weeks, perhaps until after Easter, some congressional aides said.

Many Republicans continue to oppose the measure. Even though it once appeared the legislation was likely to pass, "I really believe the momentum has slowed," said Sen. Bob Corker (R-Tenn.), a member of the Senate Banking Committee, which has jurisdiction over the legislation.

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

It is opposed by the financial services industry, which has argued for years that it would drive up losses and that homeowners would flood bankruptcy courts looking for relief. The Congressional Budget Office estimated that the change would increase bankruptcy filings by about 350,000 in the next 10 years.

Potential changes to the bill could narrow its impact, but forces on both sides are still debating the terms, congressional aides and industry officials said. The financial services industry, for example, would like to limit the measure to subprime and other risky loans. They also have lobbied to block a bankruptcy judge's ability to modify a mortgage if the borrower's lender had offered to change the mortgage terms to make it more affordable. Both of these provisions are opposed by consumer advocates and other supporters of the legislation.

"We're going to use this extra time to talk to senators on both sides of the aisle to limit this bill's damage," said Francis Creighton, chief lobbyist for the Mortgage Bankers Association, an industry group.

Supporters of the legislation scored an victory earlier this year when Citigroup, the troubled New York bank, backed the measure. But no other banks have followed its lead. Two Democratic leaders who back the legislation, Sens. Richard J. Durbin (Ill.) and Charles E. Schumer (N.Y.), are working to line up financial industry backers.

For example, according to several congressional aides, the bankruptcy legislation could be combined with a measure to increase the Federal Deposit Insurance Corp.'s borrowing authority. Banks have supported that provision because it could potentially prevent a significant increase in the fees they pay the FDIC.

"This proposal is sweet and sour. I fully support increasing the borrowing authority and bank insurance limits for the FDIC. But I have serious concerns about cramdown," Sen. Jon Tester (D-Mont.) a member of the Banking Committee, said yesterday in a statement.

Dan Mica, a former congressman who is president of the Credit Union National Association, met with Durbin on Wednesday and spoke with Schumer yesterday about the legislation. Schumer said last week that he would introduce legislation to lift the cap on how much credit unions can lend, a measure pushed by the industry. In their meeting, Schumer told Mica that he might attach that provision to the bankruptcy modification bill, according to a Senate aide.

"This proposal is very much needed on its own because banks are not lending to small businesses and credit unions will," Schumer said in a statement. "But the bill has a double benefit if it can be used as a carrot to help pass a bankruptcy proposal that will greatly reduce foreclosures."

Mica said in an interview that he has been talking with lawmakers and supporters of bankruptcy modifications for more than a year. "We would like to see the focus narrowed so it doesn't impact credit unions. Credit unions didn't create this problem, they didn't do subprime loans," he said. "Nothing would please me more than to see an agreement with Durbin and Schumer."

But, he said, it's too early to make any judgments about linking the relaxation of the lending cap to the bankruptcy provision. "My gut feeling is that in and of itself that would not be enough to address some of our members' principled objections to this," he said.