Debt-strapped homeowners facing foreclosure could resort to bankruptcy to force reductions in their monthly mortgage payments under a measure awaiting a House vote.
The bill set for a vote Thursday would let bankruptcy judges reduce the principal and interest rates on home loans. But the measure has been watered down since Democrats first proposed it, due in large part to mortgage industry lobbying to limit the cost for banks.
The plan is part of a broader housing package that also would raise the Federal Deposit Insurance Corporation's borrowing authority and take other steps to prevent foreclosures.
President Barack Obama called for the bankruptcy measure last week as part of his housing rescue plan. Democrats and consumer advocates regard it as crucial to slowing the rapid rate of foreclosures.
The mortgage industry contends the measure will impose steep and unpredictable costs on its companies, which will be forced to raise fees and interest rates for borrowers. The industry spent millions last year on a successful lobbying effort to kill the bill, which almost all Republicans oppose. Opponents call it the "cram-down."
This year, with Obama in the White House and Democrats enjoying a broader majority, a rift has emerged in the industry. One major player, Citigroup Inc., has bowed to the new political reality and moved to grab a seat at the negotiating table.
It cut a deal last month with Democrats to back the plan in return for some key concessions. The measure now in the House only applies to existing loans made before enactment and is limited to homeowners who have tried working with their lenders to adjust their loans before seeking relief in bankruptcy.
Other banks say they oppose the plan, but have changed their strategy. As they push to squash the legislation, they are stepping up their bid to gut key provisions. Among their goals: restrict the measure to a shorter time-period, certain kinds or sizes of home loans, certain borrowers, or situations where the mortgage holder — known as the loan servicer — agrees to the changes.
"I don't see a scenario where we can ever support this, but we're trying to make it the least-worst way to do the wrong thing," said Scott Talbott, a lobbyist for the Financial Services Roundtable, a trade group representing large banks. The group spent $7.8 million last year lobbying on this and other issues.
The change in tactics has paid off for the banks, now actively bargaining with top Democrats on the details of the legislation.
House Democrats agreed late Wednesday to strengthen the requirement that borrowers prove they tried other ways of modifying their mortgages before resorting to bankruptcy. They also restricted the measure to people who could not otherwise afford to make their home loan payments.
A Senate version of the measure by Sen. Dick Durbin of Illinois, the No. 2 Democrat, is expected to see a vote within weeks.
"We continue to be opposed to the bill and that hasn't changed, but we do live in the real world, and we do understand that this is very likely to happen, and we owe it to our members to recognize that reality and to limit the damage as much as possible," said Francis Creighton, a lobbyist for the Mortgage Bankers Association, which spent $4.2 million on lobbying last year. "We're encouraged by the fact that the bill is moving to limit the damage of cram-down rather than make it worse."
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