In a compromise intended to appease lenders, the House of Representatives today passed legislation that will allow bankruptcy judges to rewrite the terms or troubled borrower’s mortgages — but only if they have first tried to work with their loan servicer to obtain a loan modification or other alternative to foreclosure.

In a compromise intended to appease lenders, the House of Representatives today passed legislation that will allow bankruptcy judges to rewrite the terms of troubled borrowers’ mortgages — but only if they have first tried to work with their loan servicer to obtain a loan modification or other alternative to foreclosure.

The Obama administration considers so-called bankruptcy cram-downs a useful tool for encouraging lenders to participate in an initiative aimed at helping up to 9 million families restructure or refinance their mortgages (see story).

The House version of a bill that would amend the bankruptcy code, HR 1106, the Helping Families Save Their Homes Act of 2009, passed in a 234-191 vote.

Most of the opposition came from Republican members, although seven members of the Grand Old Party voted for the bill and 24 Democrats voted against it.

Further compromise may be required to gain passage of SB 61, a companion bill in the Senate, where Republicans opposed to cram-downs hold a greater proportion of seats.

The Senate bill’s sponsor, Sen. Dick Durbin, D-Ill., has said he is considering amending the legislation to restrict bankruptcy judges’ cram-down powers to subprime mortgages.

Critics say changing the bankruptcy code would flood courts with distressed homeowners, and raise the cost of borrowing by introducing new risks for lenders.

Cram-down supporters say those fears are exaggerated, as only those loans made in the past would be eligible for judicial modification, and lenders would step up their efforts to engage in workouts with borrowers to avoid having loan terms re-written in court.

HR 1106 includes language that would provide a legal "safe harbor" for loan servicers who modify loans and expand the scope of the Federal Housing Administration’s "Hope for Homeowners" guarantee program for refinancings.

The Obama administration said it advocates "careful changes" to the bankruptcy code that would subject only those mortgages within Fannie Mae and Freddie Mac’s conforming loan limits to court-ordered modifications.

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