Subprime: Bankruptcy bill faces roadblocks

Legislation would give judges authority to change some mortgage terms. The bill has faced intense opposition from the banking industry.

WASHINGTON (Dow Jones/AP) -- The U.S. House Judiciary Committee could vote on a bill as early as next week that would make changes to bankruptcy law aimed at helping borrowers with subprime loans avoid foreclosure, the body's chairman said Tuesday.

"Time is of the essence," Rep. John Conyers, D-Mich., told reporters after a hearing on the topic. "If we're going to do something, we're going to have to do it right away."

Reps. Brad Miller, D-N.C., and Linda Sanchez, D-Calif., introduced a bill last month that would allow bankruptcy judges to change some mortgage terms on a borrower's primary residence, potentially changing the interest rate and other features of a loan.

Consumer groups have thrown their full support behind the measure, saying that it could help 600,000 homeowners avoid foreclosure in the next two years.

The banking industry, however, has lobbied intensely against the measure, arguing that it would increase the cost of credit and create confusion in the market for mortgage debt because loan terms would be less reliable.

"Lenders, securitizers and loan servicers would have to take various precautions to avoid or offset the significant new risks (the bill) would impose," David Kittle, chairman-elect of the Mortgage Bankers Association, said at the hearing.

Conyers conceded that industry opposition to the bill could make it difficult to pass, but he said that it was necessary to help homeowners.

"We can talk all we want, but this bill is going to be tough to get through the House and the Senate," Conyers said.

Staff from the offices of Miller, Sanchez and Conyers plan to meet Wednesday with Rep. Steve Chabot, R-Ohio, to try to negotiate terms of a compromise, Conyers said.

Chabot has introduced a more narrowly tailored bill related to homeowners and bankruptcy law, and Miller has said he is willing to compromise on his legislation if it could bring broader support.

"That's what we're working towards, but I don't know if that's a bridge too far or not," Chabot said in an interview.

The Miller-Sanchez bill received a broad endorsement at the hearing from Mark Zandi, chief economist at Moody's Economy.com.

"Odds are quickly rising that a self-reinforcing negative dynamic of foreclosures begetting house price declines begetting more foreclosures will develop in many neighborhoods across the country," Zandi said. "There is no more efficacious way to short-circuit this cycle than adopting legislation to allow bankruptcy judges the authority to modify mortgages by treating them as secured only up to the market value of the property."