According to Yahoo Finance yesterday:
Seeking to provide more aid to troubled borrowers, House lawmakers on Wednesday advanced legislation that would enable homeowners to shrink their mortgages in bankruptcy court.
The bill — fiercely opposed by the lending industry but supported by Democrats and consumer advocates — was passed by the House Judiciary Committee 17 to 15, with one Republican supporting it.
Touted as a measure to save homes for trouble borrowers, the legislation could have far reaching consequences:
Mortgage-industry leaders argue that giving judges this power, which they term a "cramdown," would force lenders to charge higher rates to offset any unpaid loan balances that would be reduced in court.
Most Republicans said the bill would harm the market and called for Congress to show restraint. "What we’re doing is putting a sledgehammer in the hands of borrowers," Rep. Chris Cannon, R-Utah.
It’s concerning to see judges, not the market ,determine what the prices and interest rates should be for borrowers in bankruptcy:
Under existing law, bankruptcy judges can’t modify loan terms on a borrower’s primary residence, but can do so for mortgages on second homes. Democrats want to extend that power to primary home loans.
The bill passed by the House Judiciary Committee would let judges reduce what’s owed on a mortgage if the market value of a property falls below the outstanding loan balance. It would also give judges the ability to reduce interest rates owed on loans.
While these borrowers could enjoy lower rates, that is not likely to be the case for everyone:
industry groups quickly criticized the House vote. Bill Himpler, an executive vice president with the American Financial Services Association said in a statement it would "inject massive risk" into the lending market.
[In the financial world, "massive risk" translates as "we’re going to charge a massive premium."]
