Lenders derail plan to let bankruptcy judges modify mortgages

But this month, when the mortgage reset for the third time -- driving her monthly payment to more than $4,300 on a home worth about $470,000 -- she told the judge overseeing her and her husband's bankruptcy case that they would have to abandon the place unless their lender agreed to modify their loan.

That doesn't appear likely.

"We applied four times for a loan modification," said Floyd, 44, who has a clerical job with the Kaiser Foundation. "They told me there was nothing they could think of that we could afford."

The Floyds might have been helped by a congressional proposal to allow bankruptcy judges to approve modifications of home mortgages to stave off foreclosure. But that measure has been derailed amid fierce opposition from lenders, and even supporters concede that it is unlikely to win approval this year.

The Mortgage Bankers Assn., which spearheaded the Capitol Hill campaign, claimed that the bankruptcy measure would drive up the costs of all new residential mortgages by as much as 2 percentage points. That would be a major hit: A change from 6% to 8% on a $300,000 30-year fixed-rate mortgage would raise the payment by $402 a month, or nearly $5,000 a year.

But that claim has come under fire by critics who say the MBA cherry-picked data to paint a bleak picture of sharply higher mortgage rates. The association also misquoted a study by the nonpartisan Congressional Budget Office in a way that made it seem that the CBO supported its position against the bill.

In "talking points" posted on its website, the MBA cited a finding in January by the CBO that the consequence of the bankruptcy proposal "would be higher mortgage interest rates."

In fact, the CBO analysis states that there "could be" higher rates, and qualifies that even further by noting that the size of any increase "is difficult to predict and could depend on the exact change in policy."

The MBA removed the document with the misquotation from its website after it was questioned by The Times, and later posted a corrected version.

CBO Director Peter Orszag later told Rep. Brad Miller (D-N.C.), one of the bill's sponsors, that amending the bill to restrict it to existing mortgages only -- a change that was subsequently made -- "would attenuate any possible effect on mortgage rates."