The U.S. House of Representatives approved legislation on Thursday that will allow bankruptcy judges to reduce the principal amount of mortgage loans. The proposed law has received stiff opposition from the banking and mortgage industries, but the Obama administration and Democratic lawmakers have been unrelenting in pushing the so-called cramdown legislation through Congress.
Critics have waged a fierce lobbying campaign against the cramdown measure, claiming that it will be abused by homeowners, will encourage bankruptcy filings, and lead to higher borrowing costs.
In the newest version of the bill, however, borrowers would have to prove that they tried to modify their mortgage through the lender before seeking help in bankruptcy court. Conservative House Democrats wanted to ensure that the language of the statute made filing for bankruptcy an alternative solution only after voluntary mortgage modifications fail.
Judges would be allowed to lengthen loan terms, cut interest rates, or reduce principal balances, but only on existing mortgages, not new ones. The bill would also provide a safe haven for lenders to protect them from lawsuits for reasonable loan modifications.
In addition, the House version of the bill would permanently increase the FDIC's coverage of bank deposits to $250,000, and would triple the FDIC’s borrowing authority from the Treasury Department to as much as $100 billion in order to support its insurance fund. FDIC Chairwoman Sheila Bair said the measure would allow her to reduce insurance assessments charged to community banks.
Another provision of the bill restructures the HOPE for Homeowners program, which was originally intended to refinance 400,000 borrowers facing foreclosure, but has processed only 25 loans since it began in October. Changes to the program would allow the Federal Housing Administration (FHA) to help 25,000 borrowers over the next 10 years, officials said.
Supporters of the bill say the bankruptcy provision could reduce foreclosures by as much as 20 percent. The Congressional Budget Office estimated in a report released last month that at least 1 million borrowers stand to benefit from the allowance of cramdowns.
The House passed the legislation 234 to 191. A similar version of the bill is expected for consideration by the Senate next week.