UPDATE 2-US Senate expands relief for homeowners, banks

(Recasts, rewrites)

WASHINGTON, May 6 (Reuters) - Troubled U.S. banks and delinquent homeowners will both get fresh government aid under legislation passed by the Senate on Wednesday that lawmakers hope will help reverse a deep economic downturn.

A controversial provision that would have given bankruptcy judges the power to rewrite some home loans failed but the bi-partisan bill’s sponsors said that they were pleased.

“This bill will equip homeowners and lenders with new and improved tools to combat foreclosures,” Senate Banking Committee Chairman Chris Dodd said in a statement after the measure passed with 91 votes in the hundred-seat chamber.

The legislation eases the terms of a $300 billion housing rescue fund - Hope for Homeowners - that has been so hamstrung by bureaucracy and costly fees that the program meant to refinance 400,000 borrowers has only reached a few dozen.

Another provision of the bill will shield mortgage service companies from investor lawsuits when they lower monthly payments for troubled loans.

An amendment that would have narrowed the terms of that ‘safe harbor’ provision was defeated in a result that one lawmaker said would wrongly help pick the winners and losers of the housing bust.

“There are some perverse incentives where four large banks in our country that helped originate many of these investments are now [mortgage] servicers,” said Sen. Bob Corker, the Tennessee Republican who authored the amendment. “It’s very much like the fox guarding the henhouse.”

Bank of America BAC.N, Citigroup C.N, JPMorgan Chase JPM.N and Wells Fargo & Co. WFC.N are among the largest mortgage servicers that stand to gain from the senate bill.

Large insurers like Prudential Financial Inc PRU.N and MetLife Inc MET.N along with asset managers like Fortress Investment Group FIG.N and BlackRock Inc BLK.N stand to lose since their ability to sue mortgage servicers will be curtailed.

Mortgage servicers -- firms that collect monthly loan payments -- have said they cannot retool problem loans while the threat of lawsuits hangs overhead.

The House of Representatives has already passed its version of the legislation and Senate leaders carefully tailored their bill so the two could be easily reconciled. If that happens in the next few weeks, as Democratic leaders want, the bill would go to President Barack Obama for his signature.


The Federal Deposit Insurance Corp., which guarantees bank deposits, will be able to tap a fresh $500 billion credit line through the end of next year under one measure pushed by the lending industry.

The FDIC’s reserves, which are funded by premiums the agency charges banks, have been depleted in the last two years as a deep housing downturn and economic recession has pushed many banks over the edge.

Regulators have been contemplating a sharp rise in premiums to restore the insurance fund but expanding the Treasury credit line eases some of that pressure.

The FDIC’s credit line will be permanently increased to $100 billion, from the current $30 billion, under the new bill.

Another provision of the law would give fresh rights to renters when their landlord defaults on his mortgage.

“Tenants who do no wrong shouldn’t be evicted without notice and without the necessary time to make alternative living arrangements,” said Sen. John Kerry, the Massachusetts Democrat who sponsored the amendment.

The provision will let renters serve out their original lease even if a bank has reclaimed the property.

By Patrick Rucker with Thomas Ferraro, Al Yoon and Nancy Leinfuss contributed from New York; Editing by Andrea Ricci and Diane Craft