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Bill seeks to rescue 600K homeowners |
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By Jessica Holzer
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Posted: 09/11/07 07:53 PM [ET] |
Senate Majority Whip Dick Durbin (D-Ill.) plans to introduce legislation that would tweak the bankruptcy code to rescue as many as 600,000 borrowers in danger of losing their homes.
The bill, which the senator could introduce as soon as next week, would eliminate a provision of the 1978 law barring bankruptcy judges from resetting the terms of mortgages on debtors’ primary residences.
“The objective here is to allow, for the first time, homeowners to use the bankruptcy code to save their homes from foreclosure,” an aide to the senator said.
Durbin, who hopes to garner bipartisan support for his bill, currently is in talks with several Republican colleagues. Durbin’s staff expects Rep. John Conyers Jr. (D-Mich.), the chairman of the House Judiciary Committee, to introduce a companion bill in the lower chamber.
Banking lobbyists speculate that such legislation, which would have to be approved by the House and Senate judiciary panels, could be tacked onto the predatory-lending bills that both Rep. Barney Frank (D-Mass.) and Sen. Chris Dodd (D-Conn.), the heads of the House and Senate banking committees, have vowed to move this fall.
Dodd suggested that he would support legislation to use the bankruptcy code to help troubled borrowers stave off foreclosure. “We must act quickly to implement this important protection for borrowers. I hope that my colleagues on the Senate Judiciary Committee will move swiftly to consider any such proposals that come before their committee this fall,” he told The Hill.
Under the Durbin legislation, which is still in draft form, bankruptcy judges would be able to modify the principle of mortgage loans only to the extent that it remains equal to or greater than the current market value of the home. Interest rates or payment terms could be reset, but must still reflect the risk borne by the lender.
According to the Durbin aide, the purpose is not to allow borrowers to obtain a “sweet deal” by going to bankruptcy court: “The judge can only create a new mortgage that makes economic sense for the lender.”
Still, the banking industry is likely to oppose the legislation, which it claims will dry up credit for low-income borrowers. “The bill changes the status of mortgages from secured to unsecured, which has the effect of limiting the availability of credit and pushing interest rates up to reflect the risk,” Scott Talbott, the senior vice president for government affairs at the Financial Services Roundtable, said.
The legislation has attracted the support of about 20 advocacy groups, including the AARP, the National Association for the Advancement of Colored People and the Consumer Federation of America.
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 Center for Responsible Lending, a group that advocates for tougher laws against predatory lending, 2.2 million families are set to lose their homes, though the mortgage lending industry disputes that number.
A spokeswoman for Conyers confirmed that the House Judiciary chairman was looking into the bankruptcy legislation partly because his state has been hit so hard by the sub-prime crisis. Michigan was one of four states with the highest foreclosure rates in recent months, she said.
Rep. Brad Miller (D-N.C.), who is working on predatory lending legislation with Frank, also is mulling whether to introduce a pared-down version of the bankruptcy legislation that would sunset after three to four years, an aide said. The bill would focus primarily on lifting the prohibition against modifying mortgage terms for primary residency in bankruptcy. “The real core changes are pretty simple and they don’t need to be tied to other things,” the Miller aide said.
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