Lawmakers set new mortgage bankruptcy bill

By Patrick Rucker

WASHINGTON (Reuters) - Legislation designed to stem foreclosures by allowing bankruptcy judges to erase some mortgage debt will be introduced by Congressional Democrats on Tuesday, and hopes are high that it will pass after a similar plan failed last year.

Democrats in both the U.S. House of Representatives and Senate plan to introduce the legislation.

A similar plan failed in the Senate last spring as President George W. Bush and many Republican lawmakers opposed it, but supporters of what has been dubbed "mortgage cram-down" believe that they will prevail as the housing crisis has deepened and President-elect Barack Obama prepares to take office.

"Economic conditions have only worsened since we last debated this plan," said Rep. Brad Miller, a member of the House Financial Services Committee who plans to introduce a bankruptcy reform bill on Tuesday. "Until we stop the slide in foreclosures and falling home prices, the economy will get worse still."

Last month, Credit Suisse boosted its estimate of the number of mortgages on which it expects to foreclose through 2012 to 8.1 million -- a 25 percent increase from its April estimate.

The legislation would change allow bankruptcy judges to modify home loans in the same way that they currently may modify other unsettled obligations, such as credit card debt.

While the housing market downswing continues, some in the housing industry have warned that it is the wrong time to write long-lasting mortgage rules.

"Credit markets move like a pendulum so if you accept that there was too much credit a few years ago, there is probably too little credit now," said Francis Creighton, the top lobbyist for the Mortgage Bankers Association. "Cram-down would lock the pendulum at an overly restrictive point."