Banks Fear Democrat Bids To Aid Mortgage Borrowers

By Damian Paletta
From The Wall Street Journal Online

WASHINGTON -- Some major U.S. banks are concerned an effort by Democrats to help mortgage borrowers avoid foreclosure could lead lawmakers to scale back tough bankruptcy overhauls adopted two years ago, when Republicans were in power.

To help address defaults and foreclosures on subprime mortgages, lawmakers are pushing a bill that would allow bankruptcy judges to rework the terms and conditions of loans. Consumer groups have gotten behind the effort, and caught the ear of some Republicans from districts seeing mortgage problems.

The banking industry said such changes could dry up mortgage funding and make the cost of owning a home more expensive for all borrowers. "The bill will create risk -- and the markets will respond to that risk by increasing the interest rate or the down payment that homeowners pay," said Scott Talbott, senior vice president of the Financial Services Roundtable, an industry group.

Also worrisome for banks is the belief the bill could lead lawmakers to revisit a law intended to prevent borrowers from declaring bankruptcy to wipe out credit-card and other debts that they could afford to pay.

Financial-service companies fought for eight years to push the Bankruptcy Abuse Prevention and Consumer Protection Act through Congress. Two years ago, with Republicans controlling the House, Senate and the White House, they succeeded. The law said certain debts couldn't be erased, set up a means test for certain bankruptcy filings, cracked down on repeat filers and required borrowers to get credit counseling before filing.

Consumer groups and other opponents called the law a windfall for the credit-card industry. They said the credit-counseling and means-test provisions would force filers to pay additional lawyers' fees, worsening their financial problems.

The new bill, sponsored by Reps. Brad Miller (D., N.C.) and Linda Sanchez (D., Calif.), would allow bankruptcy judges to change the interest rate and length of a mortgage for borrowers in bankruptcy, in an effort to avoid foreclosure. It could also potentially allow judges to change the balance of a loan. For example, if a borrower near foreclosure owed $125,000 on a house now worth $100,000, the judge could mark $25,000 as "unsecured debt," which would make it much harder for the bank to recover that portion.

Several large banks, including Citigroup Inc., J.P. Morgan Chase & Co., and Wells Fargo & Co., have organized to fight the proposal. In a letter last month to House Judiciary Committee Chairman John Conyers, the banks and others warned that the bill would "prevent many low- and moderate-income Americans from owning homes."

Lenders fear the legislation could open the gates to other changes to the bankruptcy law. Some in the Senate are considering a change to the law that would provide relief to students struggling with qualified college loans.

Mr. Miller said his legislation isn't an overture to revisiting the 2005 law. He said his bill largely avoids making specific changes to the law and focuses more on the treatment of mortgages in the bankruptcy process.

Mr. Conyers said his panel could vote on the bill as early as this week. That could set the stage for action this month by the full House, where its scope possibly could be broadened.

Sens. Richard Durbin (D., Ill.) and Arlen Specter (R., Pa.) are working on a related bill in the Senate. The Senate Judiciary Committee may take it up early next year, according to a panel aide.

White House and Treasury Department officials have raised concerns about the proposals, echoing many of the banking industry's warnings. "We think it could reduce mortgage availability...and increase mortgage rates, which could tend to compound the problem," said White House spokesman Tony Fratto.

At this point, the bill's supporters may have the edge. While many Republicans remain opposed, the bill puts some -- especially those in the Midwest and other areas hit by rising foreclosure rates -- in a difficult political position. One of them, Rep. Steve Chabot (R., Ohio), is working with Mr. Miller and Ms. Sanchez to craft an approach that would help borrowers avoid foreclosure in a way that is seen as less threatening to lenders.