Bankruptcy judges would be able to reduce payments and principal for homeowners with troubled mortgages under a proposal that appeared to be gaining momentum Wednesday.
The plan to allow the courts to order lenders to modify upside-down home mortgages appeared all but dead on Capitol Hill just several weeks ago, when it was struck from the federal financial bailout bill.
But on Wednesday, Rep. John Conyers Jr. (D-Mich.) introduced a new version of the bankruptcy expansion proposal in the House of Representatives, just a day after a key lobbying group withdrew its opposition.
Such reform is also supported by key advisors to president-elect Barack Obama, including former Treasury Secretary Lawrence H. Summers, who will be chairman of the National Economic Council in the new administration.
On Tuesday, Jerry M. Howard, chief executive of the National Assn. of Home Builders, said his group would no longer oppose the proposal. Continuing home foreclosures and the economic recession have opened the group to previously off-limits ideas, he said.
“The situation’s deteriorated so much [that] every proposal needs to be considered,” Howard said.
The proposal was pulled from the bailout bill in September, when it was opposed by Howard’s group along with the Mortgage Bankers Assn. and other industry groups. The Mortgage Bankers group contended that allowing judges to force mortgage write-downs would lead to higher interest rates -- as much as 2 percentage points -- for all mortgages. The group said that in California, monthly payments would rise by hundreds of dollars.
Mortgage Bankers Assn. officials were unavailable for comment Wednesday.
Howard said his group’s newfound flexibility on the issue was “a huge acknowledgment by the home-building community that in this crisis, old doctrines don’t necessarily fly.” He said the builders would be most likely to agree to a temporary expansion of bankruptcy provisions, not a permanent one.
Builders will not oppose court-ordered mortgage modifications because they could keep more people in their homes, which in turn would mean fewer foreclosures flooding the market. Competition from cheap repossessed houses has made it difficult for builders to sell their vacant, surplus homes in many areas, Howard said.
Conyers’ bill would empower bankruptcy judges to order reductions in mortgage principal, waive prepayment penalties and stop or modify interest rate changes on adjustable-rate mortgages. Judges could also extend the length of mortgages to 40 years. Such measures would apply to mortgages on primary residences.
Sen. Richard J. Durbin (D-Ill.) introduced a bankruptcy reform bill last month that also would allow judges to modify mortgages.
Final votes on the legislation will probably take place next year, backers say.
Rep. Brad Miller (D-N.C.), sponsor of an earlier bankruptcy reform bill, said the shift by home builders was significant.
“They matter economically and politically in every [congressional] district, much more so than Wall Street. Morgan Stanley is not in my district, home builders are,” he said.
More important, Miller said, is the continuing rise of foreclosures in numerous congressional districts. “No voluntary program has worked yet” to substantially stave off foreclosures, Miller said.
Ginna Green, spokeswoman for the Center for Responsible Lending, a group that is pushing for bankruptcy reform, said prospects for legislation had improved because “the solutions brought forth to date have clearly not been effective.”
A research paper issued Tuesday by analysts at Credit Suisse projected 16% of U.S. mortgages -- or 8.1 million homes -- would end up foreclosed in coming years because of falling home values and the economic recession.
Miller said he did not expect bankruptcy filings to increase substantially if reform was passed. Instead, lenders faced with the prospect of a court-ordered loan modification would more likely cut a deal with homeowners before the borrower filed for bankruptcy. That’s what happened in the 1980s when such bankruptcy reform was enacted for family farms, he said.