The House is set to approve the most controversial plank in President Barack Obama's housing rescue plan, a measure to let bankruptcy judges rewrite mortgages to lower homeowners' monthly payments.
The measure, scheduled for a vote Thursday, amounts to a potent stick to go with the many carrots Obama is offering the mortgage industry to help stressed borrowers stay in their home loans. If the companies won't step up and help, it threatens, a bankruptcy judge will.
On Wednesday Obama's team announced details of his broader $75 billion housing plan, which features cash incentives for mortgage holders _ known as loan servicers _ who cut deals with borrowers for new, more affordable terms.
The legislation has been the subject of an intense lobbying campaign by the financial services industry, which has worked hard to kill it. It has exposed rifts among liberal Democrats who regard it as the only real way to help debt-strapped homeowners avoid foreclosures and moderates who want to give voluntary efforts a chance to work before resorting to the courts.
The same divisions are at work in the Senate, which is expected to consider its own version of the legislation in the weeks ahead. The banking lobby is turning its attention to senators in the hopes of restricting the number of homeowners who could take advantage of it before it clears Congress.
"We're hopeful that we'll be able to further focus the bill," said Scott Talbott, chief lobbyist for the Financial Services Roundtable.
The industry already has won several concessions from House Democrats, who agreed to limit the measure to existing loans, to homeowners who sought a loan modification from their lenders before filing for bankruptcy, and to people who can no longer afford to pay their mortgages.
Democrats were forced to put off action on the measure when moderates voiced concerns last week that the measure was still overly broad. They wrote a compromise that requires bankruptcy judges to consider whether banks offered homeowners reasonable loan restructuring deals before they weigh in with their own rewrite.
Borrowers also would have a responsibility to prove that they tried to modify their mortgages with their lenders before seeking help in bankruptcy court.
The deal would require judges to consider whether homeowners were offered a "qualified" loan workout consistent with Obama's plan. That program would let eligible homeowners rework their mortgages to bring their monthly payments down to no more than about one-third of their incomes.
"Bankruptcy shouldn't be the first remedy, it should be the remedy of last resort," said Rep. Dennis Cardoza, D-Calif., a moderate who helped draft the compromise. Cardoza said he still had some concerns with the legislation and Obama's housing initiative overall, which he said does not do enough to help people who aren't facing foreclosure but are still burdened with high home loan payments.
"While I welcome it to help my constituents that need it, I think it could have been drafted more equitably to share the burden and help other folks that aren't under water to pay their mortgage and also have some relief," Cardoza said of the plan.
The mortgage industry has argued that unfettered access to bankruptcy court mortgage modifications would impose steep and unpredictable costs on its companies that would be passed along to borrowers as higher fees and interest rates.
Although it calls the new compromise a good step, the industry is still opposed to the measure it calls the "cramdown." Lobbyists pressed lawmakers to limit the measure to subprime mortgages and to block homeowners who had been offered a mortgage workout by their lenders from getting one through a bankruptcy judge.
"Our main problem is bankruptcy is not an option of last resort, it's still a primary option," Talbott said. "At best, you're going to have borrowers confused. At the worst, you're going to have people gaming the system."
Supporters of the measure and a wide range of economists say that because it is limited to existing loans, banks would have no reason to raise future rates to factor in the cost of forced loan rewrites.
On backer, Rep. Mel Watt, D-N.C., said the measure is more important as a negotiating tool than it is as a remedy for homeowners who have run out of options.
"The benefit of this bill to borrowers is having that threat in their pocket, so they can use it to make lenders sit down and have a discussion with them and they have some leverage," Watt said.
The measure is part of a broader housing package that would raise the Federal Deposit Insurance Corp.'s borrowing authority and boost incentives for lenders to rework mortgages. The legislation takes $2 billion out of the $700 billion Wall Street bailout fund to bolster an existing program to allow homeowners rework or refinance their mortgages.
The bill is H.R. 1106.
On the Net:
Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.