Groups urge bankruptcy changes for home loans

By John Poirier

WASHINGTON (Reuters) - Three consumer groups on Thursday urged U.S. lawmakers to change the federal bankruptcy law to help borrowers who signed up for risky subprime mortgages keep their homes.

The Center for Responsible Lending, National Association of Consumer Bankruptcy Attorneys (NACBA) and Consumer Federation of American (CFA) estimate 2.2 million households in the subprime market either lost their homes or will lose them over the next several years. That translates to a loss of about $164 billion in household wealth, they said.

A 1978 provision of the bankruptcy code means bankruptcy courts are powerless to provide relief for major debts such as mortgages.

The language favors home mortgage lenders because it was added at a time when most home mortgages were fixed-rate and had low loan-to-value ratios, they said.

"For many families bankruptcy may be the only viable option to save their home," said Allen Fishbein, CFA's director of housing and credit policy.

"Yet this lifeline will be available only if the bankruptcy code is revised to eliminate or limit provisions that exclude home loans from bankruptcy protection," Fishbein said.

Many subprime borrowers financed their homes with a so-called "2-28" mortgage that requires low payments in the first two years of its 30-year maturity. The interest rate rises after the initial two years, leading to sharply higher monthly payments.

FALLOUT CONCERNS

The crisis has triggered concerns that the fallout may spread to mainstream lenders and damage the economy.

NACBA, the bankruptcy attorneys group, said its recent survey showed that 83 percent of bankruptcy attorneys with clients with mortgage problems say subprime mortgages are a "much bigger problem" or "somewhat bigger problem" now than five years ago.

The attorneys group is calling on Congress to end a special treatment of home mortgage loans in order to put home mortgage debt on a parity with other secured debt and allow judges to modify home mortgage debt.

One of the hallmarks of the 2005 changes to the federal bankruptcy law is a requirement for consumers to undergo credit counseling, which some groups want deleted because it costs precious time and hinders a homeowner's ability to deal with an immediate crisis.

NACBA's survey also showed that 81 percent of attorneys said it is "somewhat more difficult" or "much more difficult" for people facing foreclosure to file to save their homes now than before the changes were made in 2005.

The consumer groups said they would also like to see the elimination of "unauthorized or excessive" fees imposed by mortgage companies and attorneys after many debtors have emerged from a multiyear repayment plan.

Eric Stein, senior vice president of the Center for Responsible Lending, said it will contact lawmakers in the House and the Senate to propose changes to the law.