Mortgage bankruptcy reform is officially reclaiming the congressional stage this week — Sen. Richard Durbin re-introduced his bill Monday ahead of a hearing on the issue Wednesday in the House Judiciary Committee.
The Illinois Democrat, who has long tried to let judges restructure primary mortgages in bankruptcy, broadened his bill to mandate loan modifications and limit dividend payments by banks receiving capital from the government.
The measure is unlikely to pass this year but has a good chance of enactment next year as the Democrats widen their majorities in the House and Senate and reclaim the White House. President-elect Barack Obama has said he supports the general idea.
"The Obama Web site on the transition, in terms of his economic plans, does specifically include bankruptcy reform. The allowance of primary mortgages in bankruptcy is specifically on the agenda," said Ellen Harnick, a senior policy counsel for the Center for Responsible Lending. "We never take anything as a given, but we are very hopeful that is going to be very high on the agenda."
In recent weeks other Senate and House leaders have made it clear that the issue remains a top priority, including Senate Banking Committee Chairman Chris Dodd, Sen. Charles Schumer, and House Speaker Nancy Pelosi.
"It's unlikely that the House and Senate would be able to pass the bill this year, but we expect it to come up early in the next Congress — probably in the first quarter," said Francis Creighton, the chief lobbyist for the Mortgage Bankers Association. "The entire financial services community will rally once again against this legislation."
Financial services executives have argued that it would drive up the cost of credit for consumers, making it less available as lenders price in additional risk.
Credit unions broke ranks with bankers this year when the National Association of Federal Credit Unions supported a narrower bill approved by House Judiciary that targets subprime and nontraditional loans originated during the height of the housing boom. Some in the industry fear even these limits would set a bad precedent and could easily be expanded or made permanent.
"I'm leery of sunsets on temporary bankruptcies," said Phil Corwin, a partner at the law firm Butera & Andrews. He cited a break for agricultural loans under Chapter 12 of the Bankruptcy Code that was supposed to be a temporary measure to deal with a farming crisis and wound up becoming permanent. "I don't really believe that any sunset is going to stick."
Banking lobbyists plan to focus on killing the bill but will likely have to settle for trying to contain its impact.
"We're certainly interested in limiting the damage of this legislation," Mr. Creighton said. "We don't anticipate any scenario where we'd be able to support the legislation."
He said the legislation would let judges restructure loans to offer terms as long as 30 years, which could drive up the average mortgage rate by about 1.5 percentage points.
Ms. Harnick countered that relief would only cover loans where foreclosure was otherwise unavoidable.
"It has a means test to qualify …You basically have to establish that you do not have the income to meet this mortgage, and without this relief, you would go into foreclosure," she said.
