US House Panel Approves New Measure for Mortgage Loans on Primary Residences

A measure to allow judges to modify and reduce the principal amounts of mortgages for troubled homeowners in bankruptcy cleared a key hurdle Tuesday when it was approved by a U.S. House panel. The legislation, which is progressing quickly in Congress, would amount to the most aggressive step yet by the federal government to help strapped borrowers avoid foreclosure. Proponents to the bill contend it will force mortgage servicers to extend more loan modifications that prevent home foreclosures. Meanwhile, key mortgage industry insiders warned that these measures will raise mortgage costs for all borrowers. Bankruptcy attorneys contend that this is a small victory for homeowners who are struggling with declining home values.

The measure was approved on a 21-15 vote after its House sponsor, Judiciary Chairman John Conyers (D, Mich.) agreed to changes that would narrow its scope. “While bankruptcy reform may not provide all of the answers to this crisis, surely it provides a common sense and practical approach to helping stop the spiral of home foreclosures,” Mr. Conyers said in remarks before his panel. Under this new home financing legislation, borrowers would be eligible to have a bankruptcy judge reduce the principal balance on their mortgage which insiders consider as a “cram down.” Current mortgage law enables cram downs for home loans on vacation properties, but not for principal reductions on primary residences.

After stalling in Congress last year, Loan Modification Buzz reported that the new legislation gained momentum in recent weeks due to the shift in power in Washington and the growing perception that mortgage service companies have not reached out enough to aid troubled borrowers. House Speaker Nancy Pelosi said Thursday the measure was a “very high priority” that could move soon, possible as part of the economic stimulus legislation. More likely, it will be attached to other fast-moving legislation, such as a spending bill. In key concessions to the banking industry, Mr. Conyers agreed to alter the legislation to allow court-ordered mortgage modifications and loan workouts only for existing mortgage loans and to require that borrowers contact their mortgage lender at least 15 days before filing bankruptcy. Previously, Citigroup Inc. had demanded more revisions in exchange for throwing its weight behind the bill, a move that angered the rest of the mortgage industry.