House Approves Mortgage Bankruptcy Overhaul

The House of Representatives passed a bill on Thursday that would allow bankruptcy judges to rewrite the terms of failing mortgages. For example, a judge could lower a homeowner's interest rate, or even slash the principle loan amount. The bill is expected to face more opposition in the Senate.

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LINDA WERTHEIMER, host:

The House of Representatives passed a bill last night that would allow bankruptcy judges to rewrite the terms of failing mortgages. For example, a judge could lower a homeowner's interest rate or even slash the principal loan amount. It's a pretty controversial proposal, as NPR's Andrea Seabrook reports.

ANDREA SEABROOK: The idea is to dangle a carrot in front of banks - cash incentives to entice lenders to rework failing loans voluntarily. But if that doesn't work, this bill would provide the stick to whack the banks with -bankruptcy judges with the power to lower interest rates or even slash the amount owed.

One the House floor, George Democrat Jim Marshall argued it is a moderate approach.

Representative JIM MARSHALL (Democrat, Georgia): In essence, what this bill would do is force the parties, the lender and the borrower, without putting any taxpayer dollars in it, to deal with their circumstances that are affecting all Americans.

SEABROOK: But Republicans, like Minnesota's Michele Bachmann, said that if lenders think any given mortgage could be rewritten, they'll only raise interest rates and fees on all mortgages.

Representative MICHELE BACHMANN (Republican, Minnesota): Why would a lender make a 30-year loan if they fear the powers of the federal government will violate the very terms of that loan? They'll only make those loans at a great cost both to the borrower and to our society.

SEABROOK: With this problem in mind, moderate and conservative Democrats brokered a deal with leaders of their own party to limit these new powers only to mortgages that already exist, not future ones. Banking Committee Chairman Barney Frank said the bill won't solve the credit crisis, but it is a critical piece of the solution.

Representative BARNEY FRANK (Democrat, Massachusetts; Chairman, House Financial Services Committee): Not everybody who's being foreclosed upon can be helped or should be helped. But until we do a great deal to reduce this, you will not get an end to the current crisis.

SEABROOK: But there is still serious opposition to the bill as it's lobbed across the Capitol building to the Senate. Lawmakers there are already getting out their red pens.

Andrea Seabrook, NPR News, the Capitol.

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