Lenders: Bankruptcy Bill Will Hurt Homeowners

Senate Democrats are seeking to change bankruptcy laws with a bill that would allow judges to change the terms of mortgage loans during bankruptcy proceedings. Lenders say it would ultimately hurt homeowners by raising loan costs for all.

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STEVE INSKEEP, host:

It's MORNING EDITION from NPR News. Good morning. I'm Steve Inskeep.

RENEE MONTAGNE, host:

And I'm Renee Montagne.

The Federal Reserve chairman is taking note of the weakening U.S. economy. Ben Bernanke is testifying before Congress this morning, and he told lawmakers the Fed, quote, "will act in a timely manner to support growth," which some Fed watchers take to mean another cut in interest rates.

INSKEEP: Bernanke's appearance may provide a reminder that every action has a reaction. Low interest rates are intended to speed up economic growth. The danger is that they can also fuel inflation. And this week the government is reporting more signs of increasing prices.

MONTAGNE: Then there's this reaction to a proposal before Congress. This week the Senate considers a plan to help many homeowners and the housing industry. It would give tax breaks to home builders and help people refinance. The bill would also let judges modify the mortgages of people in bankruptcy court. That's where the reaction comes in.

Mortgage lenders say the plan will lead to higher costs for everybody else. NPR's Brian Naylor reports.

BRIAN NAYLOR: With an estimated two million homeowners facing foreclosure over the next two years, Democrats want to allow bankruptcy court judges to rewrite the mortgages of people who are about to lose their homes. Democratic Senator Richard Durbin of Illinois says it's only fair that low and middle-income Americans be given the same treatment as those who are better off.

Senator RICHARD DURBIN (Democrat, Illinois): Right now a bankruptcy judge can modify the terms of a mortgage on a family farm, on a vacation home, even on a yacht. The only debt that can't be changed in any way in bankruptcy is the mortgage on the home where a family actually lives.

NAYLOR: Democrats say their measure is essential because of the housing crisis. Earlier this week, figures showed sales of existing homes in January fell to their lowest level in nine years. Earlier this month Congress agreed on a stimulus bill that will give low and middle-income Americans rebate checks in an effort to boost the broader economy.

Democratic Senator Charles Schumer of New York says the housing proposal is the next step.

Senator CHARLES SCHUMER (Democrat, New York): This is part two of the stimulus bill, and it's every bit as important as part one. And that's because housing is the bullseye of the crisis. It started with housing, it emanates outward from housing.

NAYLOR: But the measure is meeting with stiff opposition, led by the banking industry, which says letting bankruptcy judges rewrite the terms of a mortgage will not have the affect Democrats are looking for. They say it will lead to higher mortgage rates for everyone. Richard Wall is president of Indymac Bank, a mortgage lender based in Pasadena.

Mr. RICHARD WALL (President, Indymac Bank): What this proposal would do is throw another big monkey wrench into the gears, which would say that thousands of judges around the country could now rewrite the terms of a mortgage for someone in bankruptcy. And what that means at a very basic level is that every person who's paying their mortgage on time is going to have to in effect subsidize the risk that a judge is going to rewrite the mortgage of someone who's not paying.

NAYLOR: Wall says his bank, like others, has been taking part in the Hope Now Coalition, in which banks voluntarily work with mortgage-holders in need of help by refinancing their loans and working out extended payments.

Steve O'Connor is a vice president with the Mortgage Bankers Association, an industry lobbying group. He says the fairness argument that yacht and second homeowners get their loans renegotiated, in what the industry calls cram-downs, doesn't hold water.

Mr. STEVE O'CONNOR (Vice President, Mortgage Bankers Association): One of the reasons it costs more to borrow money for a second home and investment home or a vacation home is precisely because cram-downs are allowed. So if you allow cram-downs on primary residences, you will see costs go up for those mortgages, and that's a bad outcome for homebuyers.

NAYLOR: It's not clear whether Democrats have the votes they need to overcome a threatened GOP-led filibuster of the housing measure in the Senate, and now the White House says the president will veto the bill should it reach his desk.

Brian Naylor, NPR News.

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