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