House approves mortgage bankruptcy overhaul

By Kevin Drawbaugh

WASHINGTON (Reuters) - Bankruptcy judges could cut the mortgage debt of homeowners in bankruptcy court as a last resort to avert foreclosure, under a bill approved by a 234-191 vote on Thursday in the U.S. House of Representatives.

Seen by Democratic supporters as vital to stabilizing the crumbling U.S. real estate market, the so-called "cramdown" bill has been opposed by bankers, despite amendments made this week to limit its scope, including one restricting it to existing primary residence mortgages, not future loans.

The Senate was expected to consider its own version of the House bill soon, but chances of passage are uncertain there.

The House bill has additional provisions meant to help homeowners in the worst housing market in decades, a slump that has helped pull the U.S. economy into a deepening recession.

Under present law, bankruptcy courts may reduce many forms of debt for struggling borrowers -- including a boat, car, vacation home or family farm -- but not a primary residence.

Changing bankruptcy law to allow this, say bankers and Republican opponents of the bill, would raise costs for everyone by diverting capital from the mortgage debt market.

But Democrats backing the bill discount such fears and say it could sharply cut the high U.S. home foreclosure rate.

About one in eight U.S. homeowners with mortgages, a record share, ended 2008 behind on payments or are in the foreclosure process, a mortgage industry group reported on Thursday.

President Barack Obama on Wednesday launched a $75 billion foreclosure relief plan, part of a $275 billion housing stimulus program announced last month.

SERVICERS SHIELDED

Meant to dovetail with that program, the House bill also contains a provision that would give mortgage service firms legal protection if they try to revise distressed loans.

Mortgage servicers collect the monthly payments made by homeowners. Servicers are now often hamstrung by legal agreements with mortgage-backed securities investors that can force servicers to foreclose on delinquent borrowers.

The "safe harbor" provision in the bill would shield servicers from legal action by mortgage-backed securities investors whose returns could be crimped by eased loan terms.

House Republican Leader John Boehner criticized the bill.

"When it comes to housing, today is another example of why taxpayers are fed up with the way Washington works," he said. "The American people are sick and tired of Washington forcing taxpayers to pay for those who have been irresponsible."