WASHINGTON — A key lawmaker is weighing a major concession to the financial services industry on legislation that would allow judges to rework mortgages in the bankruptcy process.
Sen. Richard Durbin, D-Ill., the lead sponsor of the legislation, said he may limit the bill to existing subprime loans. Such a move could make the legislation more acceptable to the financial services industry, which has adamantly opposed the bill.
"I'm willing to restrict this … to subprime mortgages," he said in an interview late Tuesday. "I want to make this reasonable."
The Illinois lawmaker was instrumental in getting Citigroup Inc. to agree to support the mortgage bankruptcy bill in January. Since then, he has insisted that other lenders support the Citi deal, which limited the bill just to mortgages that existed prior to the bill's enactment, and has shown no signs of wanting to further narrow the legislation.
Sen. Durbin made it clear he is only considering a subprime limitation, and has not yet decided on it. "We've talked about that as a possibility," he said. "I am willing to negotiate. I want this to be a reasonable approach, but we have to include [bankruptcy]. If we don't include it, we'll be stuck in the same mess we're in today."
His comments came as the House prepares to vote today on its version of the mortgage bankruptcy reform bill.
The most recent version of the bill, circulated by Judiciary Committee Chairman John Conyers on Wednesday, made some tweaks to the legislation designed to address problems the financial services industry has identified with the bill. But it did not go far enough, industry representatives said.
Under the revision, a borrower would not be eligible for a judicial modification if he was simply underwater on his mortgage but could afford to repay it. It would also stipulate that besides attempting to contact his servicer for a modification, the borrower would have to submit his income and expenses to his servicer in writing in an effort to obtain a modification.
But the bill would still give bankruptcy judges considerable authority to make the judgment call as to whether a borrower was eligible to have his mortgage debt crammed down by the courts.
It was unclear if that would satisfy the moderate Democrats who have raised concerns with the provision. In an interview late Tuesday, House Majority Leader Steny Hoyer acknowledged it was an issue, saying it was "part of the discussion that is going on."
But he said he did not think it would hold up the bill. "I look forward to a bill that can enjoy broad support," he said. "I think generally the proposition of sharing relief that is available to homeowners who have a first mortgage on principal homes, which is not now available, makes sense to a broad reach of the caucus and frankly of the House."
Other changes to the bill would require that judges obtain standard appraisals that are in line with Federal Housing Administration standards to evaluate a home's current value. The latest draft also prolongs the period before a borrower who sells his home after reducing his mortgage debt is allowed to earn any upside appreciation.
The manager's amendment would also require that a judge restructure a loan with a consistent payment plan that prevents tacking on balloon payments at the end of the loan term.
Lawmakers have submitted several other amendments to change the bill but the fate of those will be determined on the floor during the vote Thursday.
In the interview, Sen. Durbin said he expected the Senate to act after the House passes its bill. "We might change it, of course," he said. "There are variations we're looking at."
Lobbyists said they expect a vote within the next two weeks, but Senate Banking Committee Chairman Chris Dodd warned that without more support, Democrats may not have enough votes to pass the bill. "It's hard to know," if the Senate has 60 votes to pass the bill, Sen. Dodd told reporters Wednesday.