House lawmakers today approved a bill by a 17 to 15 vote that would enable homeowners to reduce the mortgage balance on their primary residence during bankruptcy proceedings.
The amended bankruptcy bill would only apply to subprime and other “non-traditional” mortgage loans made to borrowers between 2000 and 2007.
The term “non-traditional” applies to interest-only loans and other adjustable-rate mortgages that could lead to negative amortization. Earlier proposals didn’t specify which types of loans could be altered.
It is believed that bankruptcy judges will also be able to make changes to the interest rate paid by the borrower and/or extend the repayment period of the loan for up to 30 years.
The bill has been fiercely opposed by the mortgage industry, who feels banks and lenders will need to raise interest rates to offset unpaid loan balances that could be reduced in court.
“We oppose the changes,” said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable.
“Because the judge has the new power to cram down a mortgage, the rest of homeowners and future homebuyers will face increased interest rates. That is counter-productive to the housing market.”
Mortgage industry leaders also believe the ruling will lead to a flood of new bankruptcy filings.
Under existing bankruptcy law, judges can’t modify loan terms on a borrower’s primary residence, but can do so for mortgages tied to second homes.
Democrats argue that modifying the existing bankruptcy law could help more than 500,000 homeowners avoid foreclosure.
“We can’t simply leave it to the mortgage companies to fix this problem on their own,” said House Judiciary Committee Chairman John Conyers, D-Mich. “Our legislation, unlike the proposal from the (Bush) administration would actually help working families.”
For the 12 months ending in September, more than 770,000 Americans have filed for bankruptcy, according to government data.
The so-called “Emergency Homeownership and Mortgage Equity Protection Act of 2007″ bill, or HR 3609, will now be sent to the House floor, and still faces a series of hurdles before becoming law.
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