Democrats To Seek Mortgage Relief in Bankruptcy

Washington, DC, Jan. 6, 2009--Legislation to allow bankruptcy judges to cancel some mortgage debt will be introduced by Congressional Democrats on Tuesday in an effort to stem foreclosures.

Democrats in both the U.S. House of Representatives and Senate plan to introduce the legislation.

A similar plan failed in the Senate last spring as many Republican lawmakers opposed it, but supporters of what has been dubbed "mortgage cram-down" believe that they will prevail as the housing crisis has deepened and President-elect Barack Obama prepares to take office.

Last month, Credit Suisse boosted its estimate of the number of mortgages on which it expects to foreclose through 2012 to 8.1 million -- a 25 percent increase from its April estimate.

The legislation would change allow bankruptcy judges to modify home loans in the same way that they currently may modify other unsettled obligations, such as credit card debt.

While the housing market downswing continues, some in the housing industry have warned that it is the wrong time to write long-lasting mortgage rules.

"Credit markets move like a pendulum so if you accept that there was too much credit a few years ago, there is probably too little credit now," said Francis Creighton, the top lobbyist for the Mortgage Bankers Association. "Cram-down would lock the pendulum at an overly restrictive point."

Foes of the cram-down plan argue that it would wrongly invalidate mortgage contracts and raise future costs of borrowing, but that opposition is beginning to wilt in the face of a worsening crisis.

"This crisis is so severe that every possible solution must be on the table," Jerry Howard, president of the National Association of Homebuilders, said in a statement last week. In political battles last spring, the homebuilders had used their lobbying heft to help block the bankruptcy plan.

President-elect Barack Obama supported the foreclosure-prevention plan last year and has promised new initiatives to help troubled borrowers stay in their homes.

The lending industry has said that allowing bankruptcy judges to modify mortgage obligations would change how they weigh risk. Currently a lender knows that it has recourse to foreclosure if a borrower fails to meet mortgage payments, but the lender does not have to factor in the possibility that the payments it receives could be decreased by a judge.