WASHINGTON — Congress is poised to give bankruptcy judges more power to modify primary home mortgages in an attempt to halt the foreclosure crisis, a move Democrats and housing advocates have been pushing for two years in the face of stiff opposition from Republicans and the mortgage industry.
The House is expected to pass the legislation today, and supporters are optimistic that the Senate will follow next month.
For existing mortgages only, the measure would remove an oddity in bankruptcy law: Judges can reduce, or cramdown, the principal on a vacation home, car or boat, but they cannot do it to a mortgage for a primary residence.
As it is now, bankruptcy often results in higher mortgage payments on a primary residence because skipped payments and other fees are tacked onto the principal, for which homeowners are responsible under their repayment plans.
Backers hope the change in the law would be a strong incentive to banks and other mortgage holders to modify existing loans. They don't believe it would send borrowers rushing into court seeking to reorganize their debts under Chapter 13 of the bankruptcy code, an unpleasant and arduous task that stains a credit report for at least seven years.
They also have the support of President Obama.
"We thought bankruptcy was needed as a way to say to the industry, 'If you don't do it, somebody's going to do it for you,' " said Kathleen Day, a spokeswoman for the Center for Responsible Lending, a nonpartisan group that targets what it calls abusive lending practices.
A provision in the legislation would force people to seek a voluntary modification of their mortgage before going to Bankruptcy Court. And the change would apply only to mortgages in place when the legislation is signed into law, not future ones.
But the mortgage industry, with a few exceptions, opposes the bill. Companies argue that allowing bankruptcy judges to modify mortgages for primary residences ultimately would hurt consumers because lenders would have to raise loan costs to compensate for the increased risk that some principal might be forgiven.
"That's exactly what we need, the cost of financing homes to go up, in the economy we have right now," said David G. Kittle, chairman of the Mortgage Bankers Assn., adding that the risk of Bankruptcy Court revisions is what makes the interest rates on second-home mortgages and even credit cards higher than those on primary residence loans.
