New York Times: House to Try Again to Let Judges Alter Mortgages

By CARL HULSE

WASHINGTON — After a brief revolt, the House is scheduled to vote Thursday on a measure that would allow bankruptcy judges to change mortgage terms to help homeowners avoid foreclosure, granting new authority some lawmakers say is central to easing the housing crisis.

The Democratic leadership said it was confident it now has the support to pass the measure, which stalled last week, because of changes won by Democrats who said they feared that homeowners might use bankruptcy to win reductions in mortgages they could still afford. The Senate, where backers of the bill have faced stiff resistance, could consider its own version later this month.

Under the legislation, judges could reduce the principal owed, reduce the interest rate or extend the length of the loan. Currently, bankruptcy courts are prohibited from rewriting loan terms on primary residences even though those homes are at the heart of the foreclosure crisis. Democrats say the legislation, which would work in tandem with President Obama’s new housing plan, could cut foreclosures 20 percent. It would apply only to existing mortgages, not future loans.

“Stabilizing the housing market is central to restoring the American economy,” the Democratic leadership said in a fact sheet distributed Wednesday to encourage lawmakers to back the measure. “We all stand to lose if we do not stop the steep decline in home prices.”

The House was originally expected to easily approve the measure last week. But some Democrats who had heard complaints from the lending community and the public sought changes. They said they did not want the program abused by consumers who were simply seeking a way out of a costly mortgage while most Americans continued to make their payments.

“Our intention was to make sure this was available but as a last resort,” said Ellen Tauscher, Democrat of California. She was joined by two state colleagues — Zoe Lofgren and Dennis Cardoza — in leading the push for revisions.

To appease Democratic critics, backers of the bill made changes to try to ensure that homeowners first sought to negotiate a voluntary loan change from their lenders before filing for bankruptcy.

As a result, the bill requires a homeowner facing foreclosure to seek a loan change 30 days before pursuing one in court and to provide the necessary personal financial information to the lender. Judges would also be required to determine whether a voluntary loan modification had been sought from a lender before the homeowner entered bankruptcy.

Judges would also have to weigh a person’s income against the payments before deciding whether an interest rate or principal reduction was called for and use federally approved appraisal guidelines in determining a home’s value. Other changes are also intended to prevent mortgage reductions in cases in which a person could afford the loan.

Courts are supposed to be able to reduce a mortgage only to the current fair market value of the house and to structure payments in a way that would require homeowners to continue to pay off their original loan to the greatest extent possible considering income.

“Some may think the changes made to the bill go too far, while others will contend that they do not go far enough,” the three California lawmakers wrote to their colleagues. “Given the ever deepening housing crisis, however, we ask you to place such differences aside — as we have done — and support this effort.”

Supporters of the bankruptcy change hoped they had made a breakthrough this year when Citigroup backed the initiative, but many other top lenders remain opposed, as do many Republican lawmakers. The bill is backed by AARP, consumer groups and other housing advocacy organizations.

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