House ponders mortgage bankruptcy bill

Committee to vote Wednesday; lending industry opposed to proposal, which would aid bankrupt homeowners by letting judges reduce their loans.

WASHINGTON (AP) -- A House committee is scheduled to vote Wednesday on legislation that would permit judges to shrink the size of home loans for bankrupt homeowners - a mortgage-mess remedy supported by consumer advocates and ardently opposed by the lending industry.

Many Democrats say the proposal is a better way to help homeowners than a plan to freeze interest rates announced by the Bush administration last week and negotiated with lenders and investors.

Mortgage-industry leaders say the proposed legislation would open a floodgate of bankruptcy filings, further threatening the industry's already shaky footing. Lenders, they argue, would be forced to charge higher rates to offset any unpaid loan balances that would be reduced in court.

The House Judiciary Committee's hearing is scheduled for 10:15 a.m. EST. The bill is unlikely to head to the full House until next year, but could gather steam as Congress faces increasing pressure to do something about mounting foreclosures and defaults.


Under existing law, judges can't modify loan terms on a borrower's primary residence, but can do so for mortgages on second homes.

Democrats have pushed for legislation to extend a bankruptcy judge's so-called 'cramdown' power to primary home loans. Doing so, advocates say, could help more than 500,000 homeowners avoid foreclosure.

The bill up for consideration Wednesday is a compromise between House Judiciary Committee Chairman John Conyers, D-Mich., and Rep. Steve Chabot, R-Ohio.

It would apply to subprime loans made since 2000 to borrowers with shaky credit, and other nontraditional loans, such as those in which borrowers only make interest payments.

The bill "assists a broad category of homeowners who would not otherwise benefit" from the Bush administration's proposal, Conyers said in a statement Tuesday.


The Center for Responsible Lending, a Durham, N.C.-based consumer group, estimates that 145,000 households will qualify for the administration's rate freeze. Mark Zandi, chief economist with Moody's Economy.com, calculates that about 250,000 borrowers will likely benefit from it.

President Bush, announcing the initiative last Thursday, said 1.2 million homeowners could be eligible for relief, which includes the rate freeze and efforts to helping people refinance into more affordable mortgages.

Financial markets have been turbulent for much of the year amid worries about the growing scope of losses in investments tied to residential mortgages. On Tuesday, the chief executives of government sponsored mortgage-finance companies Fannie Mae (Charts) and Freddie Mac (Charts, Fortune 500) warned the suffering isn't over for their ailing mortgage-finance companies.

Freddie's CEO, Richard Syron, said the McLean, Va.-based company could lose an additional $5.5 billion to $7.5 billion over the next few years from soured home loans.