WASHINGTON — Federal programs aimed at modifying loans to stem foreclosures aren't working, witnesses told a Senate Judiciary subcommittee, and some lawmakers called on Congress again to pass a bill allowing bankruptcy judges to modify home loans -- a procedure known as mortgage cram-downs.
Separately, the Federal Reserve took steps to make lending terms more understandable as part of its efforts to avoid another mortgage meltdown, which triggered the deep recession worldwide.
Although economic data continue to point to the recession easing later this year, rising unemployment and the prospect of a new round of foreclosures are worrying many that a recovery could stall.
"It is clear to me that Congress must do more to help struggling American homeowners," said Sen. Sheldon Whitehouse (D-R.I.), a proponent of the mortgage cram-down bill. "If we fail to act, I fear that we put ourselves at risk -- that a vicious cycle of foreclosures, falling home values and declining tax revenues will keep us in recession for years to come."
Whitehouse, who chairs a Senate Judiciary subcommittee reviewing the measure, called on the Senate to take "another serious look" at cram-down legislation as one of his constituents testified about an inability to modify two mortgages.
The financial services industry and many Republicans in Congress have strongly opposed such a move and helped stall the legislation in the Senate this spring after the House passed the measure.
Cram-downs would give bankruptcy judges authority to reduce the loan amounts owed as a way to enable people to pay their debts and stay in their homes. The proposal has been one of the key alternatives to loan modifications.
The Fed, meantime, proposed new disclosure rules Thursday that would highlight risky features of mortgages and home equity loans, such as adjustable rates and prepayment penalties, along with rules to prohibit mortgage brokers and loan officers from getting paid more for steering people into higher cost loans.
"Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances," Fed Chairman Ben S. Bernanke said.
The rules probably won't take effect until at least next year as the Fed opened a 120-day period for the public to comment on the proposal. The Fed will have to sift through an expected flood of responses before passing final regulations, which probably will give lenders time to prepare for the new rules.
