Bankruptcy tweak can ease subprime woes, lawmakers told

By Patrick Rucker

WASHINGTON (Reuters) - A former U.S. housing secretary on Tuesday urged allowing bankruptcy judges to erase some mortgage debt, saying it would save several hundred thousand borrowers from foreclosure as a nationwide housing crisis tightens its grip.

Under current law, bankruptcy judges may restructure most loans, from credit cards to car payments, but they may not tinker with a troubled consumer's mortgage debt.

Jack Kemp, a Republican who once headed the federal Department of Housing and Urban Development, said reform could save as many as 600,000 borrowers from foreclosure and prevent $72.5 billion of homeowner wealth from being lost.

"This bill will have more impact on these home-owning families than any other option currently on the table," he told a panel of the House Judiciary Committee.

In the past, Kemp said the plan amounts to a tweaking of current bankruptcy law.

Lenders say the home loan exemption keeps those borrowing costs low. But in addition to Kemp, an economist and several consumer groups argued that today's crisis requires a change of policy, and they endorsed a bill that would give bankruptcy judges more leeway.

Congress and policy-makers have taken several initiatives to arrest an unfolding crisis of failing mortgages and sinking home values in many once-hot housing markets.

The White House has expanded some federal housing programs and the U.S. Treasury Department has midwifed an industry-led program called HOPE NOW that aims to adjust the loan terms for many troubled borrowers. Lawmakers have weighed in by offering changes to tax law that could ease the cost of failing loans.