November 13, 2008

WASHINGTON -- Senate Banking Committee Chairman Chris Dodd said Thursday he would pursue legislation as early as next week to allow homeowners facing foreclosure to seek protection in bankruptcy court.

 

A similar effort failed earlier in the year, but Dodd, D-Conn., said he believes the political landscape has changed, given the growing number of foreclosures across the country.

 

"We may be getting to the tipping point," he said.

 

To date, 936,439 homes have gone into foreclosure since the housing crisis hit in August 2007, including nearly 85,000 in October -- a 5 percent increase from September, according to RealtyTrac, an online marketplace for foreclosures.

 

While government agencies and major lenders have introduced new programs to help prevent foreclosures, Dodd and other members of the Senate Banking Committee, along with consumer advocates, believe voluntary efforts are not enough.

 

Dodd also expressed support for a proposal by Federal Deposit Insurance Corp. Chairman Shelia C. Bair to use part of the $700 billion bailout to lower monthly payments for struggling

 

homeowners who pay more than 31 percent of their income on home loans.

 

Dodd said he was "confounded" by Treasury Secretary Hank Paulson's opposition to her proposal.

 

"The foreclosure crisis is the root cause of the larger financial crisis," Dodd said. "Until we solve the foreclosure problem, we will not have any hope of solving larger economic problems."

 

Although he plans to press for legislation on the bankruptcy issue should Congress take up a second stimulus package next week, Dodd has no similar plans to institute Bair's proposal.

 

"I'm hopeful enough that jawboning will work" to convince Paulson to adopt the measure, he said.

 

Sen. Mel Martinez, R-Fla., also expressed interest during Thursday's hearing on the bankruptcy provision. Florida, he stipulated, has been hit hard by foreclosures, jumping 13 percent in the last month with more than 54,000 Florida properties lost to foreclosure just in October.

 

"I strongly support the efforts by FDIC Chairman Shelia Bair to push a more aggressive approach to loan modifications," Martinez said.

 

Martin Eakes, chief executive officer of the Center for Responsible Lending, said if Congress were to pick one thing to do in the near future to help fix the foreclosure problem, it would be to pass the bankruptcy provision.

 

"A small change to the bankruptcy code would provide judges the authority to modify mortgages and, we have estimated, help 600,000 homeowners -- maybe more -- keep their homes," Eakes said.

 

The provision, as envisioned by Eakes and Dodd, would be designed only to address the current financial meltdown. It would allow bankruptcy judges to restructure the interest and principle for struggling homeowners, but only for existing loans, and the authority would expire within a few years.

 

Up until 1978, homeowners could file for bankruptcy to protect their residence, and Dodd noted that you can file for bankruptcy now for a vacation home, a boat or a car. Banking industry executives balked at the idea Thursday during a hearing before Dodd's committee.

 

John Campbell, regional banking president of Wells Fargo & Co., cautioned that in this "very fragile market" such a change to how home mortgage defaults are handled could have negative repercussions.

 

Anne Finucane, global marketing and corporate affairs executive for Bank of America, said there are similar concerns of how investors would react if judges could reset mortgages district by district.

 

Dodd said he saw no evidence that allowing homeowners to seek bankruptcy protection would have any impact on the general availability of credit for a primary residence.

 

Eakes, who also testified before Dodd's committee, said from 1978 to 1993, some circuit court judges allowed homeowners to file for bankruptcy and reworked their distressed home loans. During that time, there was no difference in the rates charged to borrowers in those districts to others where bankruptcy was not allowed.

 

Eakes said he was frustrated by the industry arguments: "They just make me berserk."

While government agencies and major lenders have introduced new programs to help prevent foreclosures, Dodd and other members of the Senate Banking Committee, along with consumer advocates, believe voluntary efforts are not enough.