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.
The letter was signed by the American Bankers Association, American Financial Services Association, Consumer Bankers Association, Bank of America Corp (BAC.N), Citigroup (C.N), Countrywide Financial Corp CFC.N, JPMorgan Chase & Co (JPM.N) as well as other trade groups and mortgage lending banks.
But several groups threw their support behind the legislation, which they called a "common sense" solution that will cost nothing for taxpayers and help lenders recover "at least" what they would get in foreclosure.
The Bush administration has backed a couple of industry-led proposals to modify mortgages provided to subprime borrowers and the Office of Thrift Supervision is crafting another plan aimed at prodding servicers to refinance mortgages on homes whose values had fallen below the loan value.
"While the various voluntary programs that the industry has announced in recent weeks and months are a welcome acknowledgment of the magnitude of the situation, they do nothing to negate the urgent need for this legislation," the groups said in a separate letter.
The letter was signed by groups representing consumers, civil rights, labor, retiree, housing, lending and community organizations. They include AARP, AFL-CIO, Center for Responsible Lending, National Association for the Advancement of Colored People and U.S. Conference of Mayors.
Reid forecasts the bill could pave the way for about 500,000 distressed borrowers to connect with their mortgage servicer or lender to discuss foreclosure prevention options using about $200 million in fresh funds for counseling assistance.
The bill would also send $4 billion of new community development funding to regions hardest hit by the recent housing crisis so that they can purchase and patch-up abandoned properties. (Editing by James Dalgleish)
