Bill Bibbes, seated in the kitchen of his south Jackson, Mississippi, home. Democrats in the house introduced legislation to allow bankruptcy judges to modify mortgages. (Photo: Rogelio V. Solis / AP)
House Democrats unveiled a wide-ranging bill on Monday evening to prop up the housing market and most contentiously, empower bankruptcy judges to modify mortgages.
The bill includes a "cramdown" provision that allows judges to write down the principal and interest payments for a homeower's primary residence, something strongly opposed by the financial services industry and mortgage lenders.
House Democratic leaders may bring the bill to the floor for a vote on Thursday. The bill is sponsored by House Judiciary Committee chairman John Conyers (D-Mich.) and House Financial Services Committee chairman Barney Frank (D-Mass.).
When he unveiled his plan last week to help the housing sector, President Obama voiced support for allowing bankruptcy judges to alter mortgages, but emphasized that courts should be seen as a last resort. Loan modifications should be worked through between homeowners and the owner of the mortgage before homeowners turn to judges, he said.
The House bill says that a homeowner must have "attempted" to contact the lender or servicer before heading to a bankruptcy proceeding, but it does not require that the lender has received all the information. The bill also does not appear to limit the value of a mortgage that a judge can write down, which the financial services industry says opens the process up to far too many homeowners.
While most of the financial services industry opposes the cramdown provision, Citigroup earlier this year came out in favor of a form of the legislation in a negotiation with Sens. Dick Durbin (D-Illinois) and Chuck Schumer (D-N.Y.).
The financial industry praised Obama's comments that appeared to suggest that cramdown provisions would be more narrowly targeted, and they were steadfastly opposed to the House bill.
The bill would also attempt to revamp the Hope for Homeowners program that was intended to help reduce some 400,000 foreclosures. Only 517 applications were filed with the Housing and Urban Development Department by early last week. The bill would also create a safe harbor against investor lawsuits for lending companies that complete loan modifications.