House committee approves mortgage bankruptcy measure opposed by industry

Seeking to provide more aid to troubled borrowers, House lawmakers on Wednesday advanced legislation that would enable homeowners to shrink their mortgages in bankruptcy court.

The bill _ fiercely opposed by the lending industry but supported by Democrats and consumer advocates _ was passed by the House Judiciary Committee 17 to 15, with one Republican supporting it.

House leaders appeared unlikely to bring the bill up for a vote before year-end. But the effort could accelerate next year as Congress faces increasing pressure to react to mounting foreclosures and defaults. Similar legislation is pending in the Senate.

Last week, the Bush administration unveiled an initiative that would temporarily freeze rates for certain subprime mortgages, or loans offered to borrowers with spotty credit histories.

"We are in the midst of a crisis _ and one that is deepening," said Rep. Steve Chabot, R-Ohio, the lone Republican to support the bill, adding that he was "worried about keeping the residents of my district and in the state of Ohio in their own homes."

Home foreclosures reached an all-time high nationwide in the third quarter, with Ohio the top state in percentage of loans in foreclosure, and ninth in delinquencies not yet in foreclosure, according to report released last week by the Mortgage Bankers Association.

Mortgage-industry leaders argue that giving judges this power, which they term a "cramdown," would force lenders to charge higher rates to offset any unpaid loan balances that would be reduced in court.

Most Republicans said the bill would harm the market and called for Congress to show restraint. "What we're doing is putting a sledgehammer in the hands of borrowers," Rep. Chris Cannon, R-Utah.

Meanwhile, Sen. Charles Schumer, D-N.Y. was in talks Wednesday to speed up a vote on a bipartisan bill to expand the authority of the Federal Housing Administration, a Depression-era agency that insures loans made to low-income borrowers.

Sen. Tom Coburn, R-Okla. has twice blocked efforts to pass this bill on a voice vote, but was negotiating with Schumer's staff on Wednesday on a way to permit a vote to go forward. "So far, we are on track and hopefully we can reach an agreement," Schumer said.

The bankruptcy bill has been far more controversial, and industry groups quickly criticized the House vote. Bill Himpler, an executive vice president with the American Financial Services Association said in a statement it would "inject massive risk" into the lending market.

Under existing law, bankruptcy judges can't modify loan terms on a borrower's primary residence, but can do so for mortgages on second homes. Democrats want to extend that power to primary home loans.

The bill passed by the House Judiciary Committee would let judges reduce what's owed on a mortgage if the market value of a property falls below the outstanding loan balance. It would also give judges the ability to reduce interest rates owed on loans.

Doing so, advocates say, could help more than 500,000 homeowners avoid foreclosure. For the 12 months ending in September, more than 770,000 Americans have filed for bankruptcy, according to government data.

"We can't simply leave it to the mortgage companies to fix this problem on their own," said House Judiciary Committee Chairman John Conyers, D-Mich. "Our legislation, unlike the proposal from the (Bush) administration would actually help working families."

The bankruptcy bill would apply to loans made to borrowers with shaky credit since 2000, and other nontraditional loans, such as those in which borrowers only make interest payments.

President Bush, announcing his administration's initiative last Thursday, said 1.2 million homeowners could be eligible for relief, which includes the rate freeze and efforts to helping people refinance into more affordable mortgages.

Speaking in New York on Wednesday, a Treasury Department official deflected criticism Wednesday that the plan's requirements are too narrow to help enough struggling homeowners.

"The goal is to have a framework of how things can be moved quickly through the process," said Undersecretary of Domestic Finance Robert K. Steel at a lending and foreclosure summit in New York.

However, the Center for Responsible Lending, a Durham, N.C.-based consumer group, estimates that 145,000 households will qualify for the administration's rate freeze. Mark Zandi, chief economist with Moody's Economy.com , calculates that about 250,000 borrowers will likely benefit from it.

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AP Business Writer J.W. Elphinstone in New York contributed to this report.