The House approved legislation 234 to 191 on Thursday that would let bankruptcy judges modify mortgages, but the bill's fate in the Senate remains unclear.

Though House leadership had enough of a majority to pass the bill over opposition from Republicans and several conservative Democrats, Senate leaders do not have as much leeway.
Some Senate Democrats, including Sen. Evan Bayh of Indiana, continue to push for ways to narrow the bill, encouraged by the banking industry, which says the legislation would drive up the cost of credit.

"Further compromise is coming in the Senate," said Brian Gardner, an analyst with KBW's Keefe, Bruyette & Woods. "The Republican leadership will be able to keep their caucus unified, and that means Democrats can't afford to lose any of their members. And there could be a small number — and that's all you need — to force a compromise."

Senate Majority Whip Richard Durbin said last week that he was open to a compromise, but one has yet to emerge.

After Durbin said he would consider having the bill apply solely to subprime loans — a position he later reversed — House lawmakers delayed a planned vote last week on their version of the bill in an attempt to win more support.

But the bill to be voted on Thursday was little changed, including modified language designed to encourage borrowers to attempt to seek a loan modification from their lender before bankruptcy.
For example, if a servicer offered a borrower a loan modification, the homeowner would have to consider it before heading to bankruptcy court. The judge would retain the ultimate say in determining if the borrower acted in good faith and could still reduce the terms of the mortgage.
The borrower also would have to wait 30 days between trying to receive assistance from the servicer and going to bankruptcy.

The modified bill also included language that said instead of reducing principal, the judge could consider reducing the interest rate to 2% if that would bring the borrower's debt-to-income ratio to 31%, but the judge would not be required to adjust the loan in such a manner.

Industry representatives and Republican lawmakers said the changes did not go far enough.
"It was pulled off the House floor because it was going to be made better," said Rep. Virginia Foxx, R-N.C., said during debate. "We knew there were moderates that had problems with this bill. They have now been fooled into thinking this bill is better, and it's not."

Industry lobbyists are more hopeful of success in the Senate, where they see a better chance of influencing the debate.

"We would expect near-unanimous support for addressing financial industry concerns from the Republican side, and we believe there are a good number of Democrats that are sympathetic to those concerns," said Phil Corwin, a partner at Butera & Andrews, who has lobbied on bankruptcy reform.

Industry representatives are seeking two main concessions, including limiting the bill to only subprime and Alt-A mortgages.

They are also seeking to add a requirement that borrowers who declined a loan modification offer, such as President Obama's recently announced foreclosure prevention plan, would be ineligible for a modification in bankruptcy.

Some said restricting the bill to subprime and Alt-A could be an uphill battle.

"That will be a heavy lift, because there are people in trouble on standard mortgages — that's a tough sell in this political and economic environment," Corwin said.

But observers said more limitations have a greater chance.

"Even if the Senate can't limit it to subprime and nontraditional, they probably can get to a requirement that you take the loan modification first," Gardner said.

The legislation includes other measures that could stall it.

Though the House bill includes some less controversial items — including giving servicers protection from lawsuits and increasing the Federal Deposit Insurance Corp.'s borrowing authority to $100 billion — it also would permanently raise the deposit insurance limit to $250,000.

Legislation enacted last year temporarily raised it to that level from $100,000 until Dec. 31, 2009, but Sen. Richard Shelby, the Banking Committee's top Republican, is said to oppose any permanent increase.

"That could be something that slows down the bill," KBW's Gardner said. "But in this environment, and given everything else going on in the financial markets, it would be tough to turn down legislation to permanently increase the cap on deposit insurance."

Democratic leaders have also said a permanent coverage increase is essential.
The bill "not only has the bankruptcy cramdown in it, but it also does some things that are so important," Senate Majority Leader Harry Reid said last week.

"They're technical in nature, but extremely important. For example, to make the $250,000 … permanent, rather than have it terminate in just a short few months."

On Thursday House members continued to clash over the purpose of the bill, with Republicans arguing that it would further dry up credit during the economic crisis.

"Passage of this legislation in its current form could send mortgage rates higher for our regular homeowners as creditors pass on the risk of bankruptcy procedures," said Rep. Shelley Moore Capito, R-Pa.

"We must be certain that in a pursuit of helping those that deserve help and need help that we do not unduly burden those who have worked to keep their heads above water."

Democrats countered that the bill was necessary to assist struggling borrowers.

"Similar modifications are available for every other type of secured loan except for a loan secured by a primary residence," said Rep. Alcee Hastings, D-Fla. "If a billionaire can modify a loan on a private jet … why can't we allow this?"

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