House passes bill to let judges rewrite mortgages

— -- The House on Thursday approved contentious legislation that would give bankruptcy judges new power to change mortgages so they're more affordable for homeowners.

The new granting of judicial power would be aimed at prodding lenders and other servicers to make mortgage changes — an influential stick in the Obama administration's housing rescue plan, which also provides financial incentives for servicers that make mortgage modifications.

"Americans all agree that homeowners bear personal responsibility for their actions and their debts," House Speaker Nancy Pelosi said. "But lenders must also act in good faith." Giving judges the power to make those changes, which currently isn't allowed, has been portrayed as vital to reducing the galloping pace of foreclosures. Supporters say the bill could reduce foreclosures by 20%.

"With another family facing foreclosure every 13 seconds, the need to put the economy before politics couldn't be clearer," said Center for Responsible Lending President Michael Calhoun. And if lenders don't help reduce a mortgage, bankruptcy will provide a backstop.

But critics have waged a fierce lobbying campaign against the measure, which they say will be abused by homeowners, encourage bankruptcies, and lead to higher borrowing costs in the future.

The House bill, which hit delays due to concerns from some moderate and GOP lawmakers, has undergone several changes meant to avoid potential abuses.

Details of the bill:

•Allows bankruptcy judges to make changes on existing loans only, not future ones. Changes could include reducing the principal or interest rate, as well as extending the length of the loan. They could lower the interest rate to as low as 2%.

•But first, homeowners must try working with their lenders to modify their loans at least 30 days before seeking relief through bankruptcy. Judges also would be required to take steps, such as appraisal guidelines, to make sure modifications aren't made unless the homeowner really is unable to make the monthly payments.