By Jessica Holzer - 10/05/07 07:09 PM EDT
After discussions on sponsoring legislation jointly had stalled, Durbin and Specter on Wednesday introduced separate bills to use the bankruptcy code to help avert a wave of foreclosures in the sub-prime mortgage market.
But the pair now is searching for a bipartisan compromise that they can push through the Judiciary panel, where Durbin is a member and Specter is the top Republican.
A deal between the two lawmakers could result in the most muscular response by Congress to the woes of sub-prime borrowers and the bout of risky mortgage lending in recent years.
Unlike legislation to crack down on mortgage abuses, a bill changing the bankruptcy code would not need the approval of the narrowly divided Banking panel, which many lobbyists predict will be the graveyard of any attempt to overhaul lending practices.
“There’s a significant chance of this being adopted,” one banking lobbyist said.
The law, established in 1970, currently allows bankruptcy courts to adjust the terms of mortgages for second homes and family farms. Under the Durbin proposal, primary residences would get the same treatment. The senator says that the change could save as many as 600,000 families from foreclosure.
“The senator is not doing anything that’s not already available to vacation homes and family farms,” a Durbin aide said.
By contrast, the Specter bill would grant more modest powers to bankruptcy judges to help borrowers stave off foreclosure. It would also apply to a smaller pool of borrowers: homeowners whose mortgages were issued prior to Sept. 26, 2007, who seek relief in the next seven years.
On Thursday, a subcommittee of the House Judiciary panel marked up legislation sponsored by Rep. Brad Miller (D-N.C.) that would make changes to the bankruptcy code along the lines of the Durbin bill. It was unclear whether House Judiciary Committee Chairman John Conyers Jr. (D-Mich.) will also introduce a similar bill.
The banking industry is wary of attempts to address the sub-prime problem through changes in the bankruptcy code.
“Any time you change the terms of a contract at the end you, one, cause uncertainty in the markets and, two, over time, you increase the cost of credit and reduce the number of people who get it,” the executive director of the American Bankers Association (ABA), Floyd Stoner, said.
According to Durbin, the biggest sticking point in his discussions with Specter is the leeway given to bankruptcy judges to work out better payment schedules for borrowers. Under the Specter legislation, lenders would be able to veto any new terms.
“We need to work on that. It’s a critical point,” Durbin said.
Citing data showing that only a tiny number of loan “work-outs” have occurred in the last month, Ellen Harnick, the senior policy counsel for the Center for Responsible Lending (CRL), argued that it was crucial to give bankruptcy judges the final say on any new terms.
“Many [mortgage] services are saying that the reason why they’re not modifying is they fear lawsuits from investors,” she said. “A change in the bankruptcy law along the lines of what Durbin has proposed would give the lenders the cover they need to make these modifications.”
Banking regulators expect more than a million sub-prime mortgages to reset at higher interest rates this year and nearly as many to reset early next year. According to the CRL, which advocates for tougher laws against predatory lending, 2.2 million families are set to lose their homes, although the mortgage lending industry disputes that number.
Sen. Charles Schumer (D-N.Y.) has called for steering substantial funds to nonprofits that counsel borrowers on avoiding foreclosure. The Senate passed $100 million in such funding earlier this year. The Bush administration has also requested $120 million in funding for one group, NeighborWorks, and $50 million for the Department of Housing and Urban Development to provide counseling.
One banking lobbyist suggested the lenders might find something they could support in a Durbin-Specter bill, calling the lawmakers’ proposals “elegant ways to transfer money from investors to borrowers with no cost to the taxpayers.”