UPDATE 1-US Senate plans foreclosure bill debate next week

(Adds comments from consumer groups, background)

By John Poirier and Patrick Rucker

WASHINGTON, Feb 22 (Reuters) - The Democratic-led U.S. Senate plans to begin debate next week on a home mortgage foreclosure-prevention bill that would let bankruptcy judges erase debt and that would provide billions of dollars to rehabilitate abandoned properties.

Democrats drafted the measure, which could come up on the Senate floor as early as Tuesday, amid mounting election-year concerns about a surge in home foreclosures that has rocked financial markets around the globe and put the U.S. economy at risk of recession.

In preparation for debate, Democratic leaders have reached out to their Republican counterparts to try to agree on possible amendments and avert potential procedural roadblocks, Democratic aides said on Friday.

The "Foreclosure Prevention Act of 2008" is sponsored by Senate Democratic leader Harry Reid of Nevada and is multilayered legislation that includes elements likely to draw bipartisan support and others that will spark Republican ire.

A plan to let local housing agencies refinance shaky loans by issuing tax-exempt bonds is broadly supported by the Bush administration and both parties of Congress, but the proposal to let bankruptcy judges tinker with home loans faces opposition from the mortgage industry and many Republicans.

Banking lobbyists say the bankruptcy provision would drive up borrowing costs since lenders will want to charge more as an insurance policy against possible bankruptcy-related losses.

"This provision will have the exact opposite effect intended by increasing the cost of mortgages for all borrowers in the form of higher interest rates or down payments, or both," the lobbyists said in a letter last week to Reid and Senate Republican leader Mitch McConnell of Kentucky.