Banking lobbyists still say they have a shot at narrowing mortgage bankruptcy reform, even though Democratic leaders appear poised to include it in broader legislation.
The idea of letting judges cram down mortgage debt has tremendous political momentum, including support from a new administration for bankruptcy reform.
But industry representatives are still trying to limit cramdowns by doing things like limiting the bill to subprime loans or cases where the mortgage is specifically blamed for the borrower's foreclosure. Lobbyists are also pushing to let servicers recoup losses from crammed-down loans after the home is sold, as well as to exempt loans that are backed by the government.
"Our official position is we remain opposed to cramdowns; we think it would destabilize the market. At the same time, we recognize the realities of the political landscape," said Steve O'Connor, the senior vice president of government affairs for the Mortgage Bankers Association.
"We want to emphasize the need to be mindful to contain any damage that might result" from a cramdown, Mr. O'Connor said. "There are a couple of potential principles we've talked about as ways to do that, and one would be to limit cramdowns to a certain vintage of loans."
Floyd Stoner, the head lobbyist for the American Bankers Association, said the group is pushing to strip down the measure to limit it only to nontraditional loans.
"We are talking about alternatives to the bills that are on the table," he said.
Still, many observers say it will be tough to contain the measure, since the political climate supports aggressive action to prevent foreclosures.
"It's going to be extremely difficult for the industry to narrow the scope of this bill, because one way or another, it's going to be painted as denying help to the middle class," said Jaret Seiberg, a political analyst with Stanford Group Co.
The strongest supporters of bankruptcy reform in Congress say the political winds are strongly on their side.
"My sense is that because the economy has changed, the politics has changed, too," said Rep. Brad Miller, D-N.C., a member of the House Financial Services Committee.
"If other members are getting from their constituents what I'm getting, it's impatience that's probably outright anger directed at the financial industry that is unlike anything I've seen before."
The Treasury Department's $700 billion bailout of the financial services industry "has really made people very angry," Rep. Miller said.
Constituents "think we are helping an industry whose own deeds led to their problems, and they were making very large profits," he said. "Now we are spending trillions of dollars to bail them out. The popular anger over that is enormous. I think that has changed the politics, too."
Democratic lawmakers and the Obama administration are still figuring out a home for the bankruptcy reform measure. Senate leaders would like to move it into the economic stimulus package, but administration officials are signaling opposition to that plan, preferring to put the measure in other legislation and not slow down the stimulus with anything controversial.
At a House Judiciary Committee hearing on the subject Thursday, reform advocates pressed to include the measure in the stimulus, saying that would improve the odds of quick enactment.
"We want it included in the economic stimulus legislation," said Rep. Maxine Waters, D-Calif. "We want it passed, and we want it done now."
But other observers said it was still an open question whether bankruptcy reform is added to stimulus or a different bill.
"There is a political fight right now as to whether you put this in the stimulus package to ensure it gets done or leave it for a broader housing bill," Mr. Seiberg said.
Industry representatives said, despite the politics, lawmakers may not fully be aware of certain consequences from mortgage cramdowns.
Some suggest a final provision should leave out government-backed loans, such as those insured by the Federal Housing Administration or the Department of Veterans Affairs, since allowing those to be rewritten could nullify the government backing.
"One of the important issues that has not been addressed is the question of the treatment of FHA and VA loans in cramdowns and the negative effects that could have on that segment of the market," said Scott DeFife, a senior managing director of government affairs for the Securities Industry and Financial Markets Association. "Servicers in these programs are going to be far less likely to participate if they are liable for retroactive cramdown losses, because it's been determined that cramdown doesn't trigger the guarantee."
Such a fallout would impede efforts by the FHA to modify loans through its Hope for Homeowners refinancing program, he said.
"This would work against the effort to get more people into loan mods through FHA and Hope for Homeowners if servicers leave this segment of the business," Mr. DeFife said.