House OK's plan for court mortgage reviews

Supporters of a bill to let bankruptcy judges modify mortgages say it would be a crucial tool to prod banks to negotiate with homeowners. Above, Las Vegas, where the housing crisis hit hard. (Jae C. Hong/Associated Press)

WASHINGTON - A plan to give debt-strapped homeowners a chance to lower their mortgage payments through bankruptcy courts won House approval yesterday as a report revealed that foreclosures and past-due home loans hit a record 5.4 million last year.

The legislation, part of President Obama's housing rescue plan, is facing a much tougher road in the Senate amid the same industry opposition and reservations from moderate Democrats that nearly derailed it in the House.

The House passed the bill 234-191, mostly along party lines. The Senate could consider it within weeks.

It would give bankruptcy judges - who now can modify loans for such items as cars and student loans, but not for primary residences - new power to reduce the interest rate and principle on a home mortgage.

Supporters regard the threat of a mortgage modification in bankruptcy as a crucial tool to prod banks to negotiate with homeowners for more affordable terms. Critics argue the measure would create a flood of bankruptcy filings, driving up mortgage rates and further destabilizing the battered housing market.

Figures released yesterday show that nearly 12 percent of all Americans with a mortgage - a record 5.4 million homeowners - were at least one month late or in foreclosure at the end of last year.

That's up from 10 percent at the end of the third quarter, and up from 8 percent at the end of 2007. In addition, the numbers now include many once-qualified borrowers who took out fixed-rate loans.

The House bill is the product of a compromise between dueling Democratic factions. A group of moderates broke with liberal backers last week and refused to support the measure unless it included several changes the banking lobby had sought.

The measure would bar homeowners from getting loan modifications in court unless they have first tried to work out a deal with their lenders and have no other way of affording their mortgages.

It also would let judges consider whether the home loan company had made a reasonable offer to change the terms, allowing homeowners to reduce his monthly payments to about one-third of their income.

Divisions run even deeper in the Senate. A group of Senate Democrats seeking industry support for the bill cut a deal with Citigroup Inc. earlier this year to include some restrictions. They agreed to limit the measure to existing mortgages and cases where homeowners had sought rewrites from their lenders.

Senator Dick Durbin of Illinois, the number two Democrat, went further recently, saying he was considering scaling back the bill even further to apply only to subprime mortgages - another restriction the industry has been seeking.

Proponents of the measure see such changes as fatal.

In the House, "that kind of poison pill has not gotten any traction. The Senate, obviously, is a little more worrisome," said Austin King of ACORN, an advocacy organization for low-income people.

Republicans are bitterly opposed to the measure, which they say will prompt lenders to raise interest rates.