Controversial legislation that would give bankruptcy judges the power to modify mortgage loans is facing a major battle in Congress, according to the Associated Press (“Fight Is On Over Judges Altering Mortgages,” Jan. 26, 2009).

Supported by President Obama and most Democrats in both the U.S. House and Senate, the bill would grant bankruptcy court judges the authority to adjust mortgage loan terms, including interest rates, repayment terms, and principal, for homeowners filing bankruptcy and would force lenders to abide by the modified mortgage loan terms.

Although congressional Democrats support the bill as the quickest way to slow the housing market collapse, especially since existing federal mortgage modification programs don’t necessarily guarantee that homeowners will be able to avoid foreclosure, many banks and other private lenders have raised staunch opposition to the legislation.

Ten groups representing the lending industry, including the U.S. Chamber of Commerce and the Mortgage Bankers Association, have spent over $83 million to defeat the measure, claiming that the legislation would harm profits for both lenders and investors.

If the legislation passes, says Steve O’Connor, a lobbyist for the Mortgage Bankers Association, lenders that experience substantial losses as a result of a judge’s decision to modify a home loan would, in turn, need to charge higher interest and ask for larger down payments from new home buyers to recoup their losses.

While banks argue that the legislation is not really needed — homeowners have several federal loan modification programs available to them if they want to work directly with their lender — currently only 8,500 of the 45,000 homeowners who sought to avoid foreclosure by working out their loans under an FDIC loan modification program have had their loans restructured. Under the Hope for Homeowners initiative passed by Congress in July, which initially targeted 400,000 borrowers in foreclosure, only 350 families have had their loans modified so far.

However, statistics paint a grim picture for homeowners, suggesting that even more borrowers could end up in foreclosure if the new law doesn’t pass. Over 8 million homes, or 16 percent of all mortgage loans, are expected to end up in foreclosure over the next four years, according to projections from Credit Suisse, an international financial services group.

“It’s obvious to us that lenders are not trying to help the homeowner but minimize how much they lose,” said Avi Shenkar, president of GMA Modification in Florida (“Few South Florida Borrowers Can Revise Mortgages,” The Miami Herald, Jan. 19, 2009). “They have a very thin margin for loan modification.”

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