WASHINGTON — In an attempt to ease the foreclosure crisis, the House on Thursday approved a major change to bankruptcy law that would give judges new powers to modify home mortgages.
The revision, which was approved 234 to 191 as part of a broader housing bill, would allow bankruptcy judges to reduce, or "cram down," the principal owed on an existing mortgage for a primary residence. Before that can happen, however, homeowners would have to seek a voluntary modification from their lender and agree to share any profits if they sell the house within five years.
The legislation faces a tougher road in the Senate, although supporters there expressed optimism that the nationwide surge in foreclosures would help them pass it as early as next week.
Since 1978, judges have had the authority to reduce the principal on loans backed by almost all forms of property -- including second homes, cars and boats -- but not on primary residences.
Backers of the revision approved Thursday said it should be extended to primary homes.
"This is the same opportunity that owners of vacation homes, investment properties, private jets [and] luxury yachts have long enjoyed," said Rep. Zoe Lofgren (D-San Jose). "I think it's only fair that we offer it now to average families as well."
The measure's supporters said they hoped the threat of a court-ordered reduction in loan principal would induce lenders to voluntarily modify mortgages.
But most of the mortgage industry and many Republicans opposed the legislation. They argued that it would make bankruptcy too easy for struggling homeowners, leading to a flood of filings to reorganize debt under Chapter 13.
Opponents of the revision also said it would raise mortgage rates as lenders tried to offset the risks that existing mortgages would be reduced.
"It is a classic example of the law of unintended consequences," said Rep. Dan Lungren (R-Gold River). "When you introduce additional risk . . . you are going to jeopardize the accessibility and eligibility of these mortgages to everybody."
The House vote came as the Mortgage Bankers Assn. released a survey showing that a record 5.4 million U.S. homeowners, or nearly 12%, were at least a month behind in their payments or in foreclosure. In California, the percentage was higher, at 13.3%, or about 785,000 homeowners.
President Obama has called for the change in bankruptcy law as part of his plan to reduce foreclosures, which continue to drive down housing prices and infect the economy.
