Democrats Reach Deal on Mortgage Bill

By Jim Kuhnhenn and Julie Hirschfeld Davis

WASHINGTON -- For key moderate Democrats in the House, giving debt-strapped homeowners the right to seek mortgage modifications in bankruptcy court had to be a last resort.

So they wrote a compromise to a housing bill that requires bankruptcy judges to consider whether banks offered homeowners reasonable loan restructuring deals before they weigh in with judicial remedies.

The new language is expected to ease the bill onto the House floor for a vote as early as Thursday.

"The concern is that we want to ensure that those people who get relief have tried other avenues," House Majority Leader Steny Hoyer ( D., Md.) said Tuesday.

Borrowers also would have a responsibility to prove that they tried to modify their mortgages with their lenders before seeking help in bankruptcy court.

Rep. Zoe Lofgren, (D., Calif.) one of the centrist negotiators on the bill, said homeowners in fear of losing their homes would have to show that they provided their financial documents to their lenders, "not just a phone call to an answering machine."

The deal would require judges to consider whether homeowners were offered a "qualified" loan workout -- defined as one that would set monthly payments equal to about one-third of a homeowner's income.

Bankruptcy judges would have to deny a judicial mortgage adjustment in cases where the homeowner is deemed able to afford the loan.

The changes bring the legislation closer in line to what President Barack Obama's administration has sought and what the banking lobby finds acceptable. The mortgage industry has argued that unfettered access to bankruptcy court mortgage modifications would impose steep and unpredictable costs on its companies that would be passed along to borrowers as higher fees and interest rates.