Mortgage Bankruptcy Bill Re-Introduced

A controversial mortgage aid bill returns for lawmakers' consideration. First introduced in 2007, Senator Richard Durbin (D-IL) and Representative Brad Miller (D-NC) have re-introduced the Democratic plan to change bankruptcy law. The plan would give judges the authority to adjust the terms of primary, or first mortgages.

The bills are a continuation of a campaign launched by Durbin in December 2007, and was later co-sponsored in 2008 by then Senator Barack Obama. This effort fell short on opposition from President Bush and many Republican lawmakers. Often described as a mortgage "cram-down," opponents of the bill fear the negative impacts it will have on mortgage rates.

The Mortgage Bankers Association cites stiff consequences for this broad power, claiming "mortgage rates would increase by at least one and a half points. In addition, lenders will be forced to require higher down payments and charge higher costs at closing." Their position is based on the cost of offsetting the potential risk of judges writing down significant portions of their assets.

Advocates contend that it is an expediant way to help distressed homeowners without putting another burden on the American taxpayer. Of course, that really begs the question of how many homeowners will really be helped. Considering a mortgage delinquency rate of less than 10 percent and an even smaller percentage that will actually go to bankruptcy court--the potential impact on the majority of homeowners' mortgage rates is significant.

Many political analyst are projecting this plan to move swiftly through Congress considering the changed composition of Congress, shifting to a strong Democratic majority and the previous support from President-elect Obama. However, there is argument that if the bill receives opposition, Obama may not be willing to expend his early political capital on this initiative.

Given the recent concerns over the effectiveness of loan modification programs--these bills may be headed for the rocks again.