House bill would let courts alter mortgages

By Al Yoon

NEW YORK (Reuters) - Bankruptcy courts would be allowed to alter mortgages written by "predatory lenders" in moves that could save 600,000 Americans from foreclosure, according to the author of a bill introduced in the U.S. House of Representatives on Friday.

The legislation would repeal a provision that prohibits a bankruptcy court from modifying a home's first mortgage, according to Representative Brad Miller, a North Carolina Democrat, who sponsored the bill along with Democrat Linda Sanchez of California.

The bill is co-sponsored by Barney Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee.

Delinquencies and foreclosures have soared as the U.S. housing market soured in the past two years, putting the spotlight on ways to modify loans that are resetting to higher interest rates. Some 5 million adjustable-rate mortgages are slated to reset over the next 18 months, and loan modifications are still "few and far between," Miller said in an interview.

"Everyone will know what will happen in bankruptcy, so the fact that bankruptcy is an option would lead to negotations" between the borrower and lender ahead of that event, he said.

Countrywide Financial Corp, which as the nation's No.1 mortgage lender has provided one in five home loans this year, on Monday said it has provided assistance on some 35,000 mortgages this year, including modifying terms on 17,000 loans.

But a report by Moody's Investors Service last week found that lenders eased borrowing terms on just 1 percent of subprime mortgages with interest rates that reset in January, April and July.

Under loan modifications, the lender and loan-servicing company change the mortgage terms to make them more affordable to the borrower. This can include lower interest rates and forgiving a portion of the principal.

Wall Street and bond rating companies have criticized loan modifications since investors who bought the riskiest portion of the bonds may be treated more favorably than owners of safer slices once a loan is modified. Most mortgages also end up as mortgage-backed securities whose covenants sometimes disallow changes to the underlying collateral.

Despite hurdles, modifications are seen as still the best alternative for the $7.2 trillion mortgage bond market, which is credited for both raising money for the U.S. real estate boom and the excesses that brought housing to its knees last year, according to the American Securitization Forum, a lobbying group. Foreclosure is more costly for lenders and investors, it argued.

The bill is also co-sponsored by Democrats Carolyn Maloney of New York and Mel Watt of North Carolina.

"Responsible lenders who made loans on reasonable terms have nothing to worry about in bankruptcy court," Miller said in a statement. "Predatory lenders" may be saddled with the loans, he said.

(Additional reporting by Jonathan Stempel in New York)