Plan May Keep People In Homes

A plan to let bankruptcy judges alter the terms of home loans so owners can avoid foreclosure moved one step closer to reality this week.

It's a move that could help thousands of Florida's troubled homeowners stay in their houses.

"In a state like Florida, where the values of homes have dropped so much, I think the bankruptcy courts will be overwhelmed with work," U.S. Bankruptcy Judge Catherine Peek McEwen said. "This could help a lot of people."

The proposal would allow bankruptcy judges to rewrite loans to reflect the amount a home is worth now, instead of what the homeowner paid. In the Tampa Bay area, home prices have plummeted nearly 20 percent in the past year.

Bankruptcy judges are now prohibited from altering first mortgages on primary homes, but they can change the terms on loans for other kinds of property, including vacation homes, boats and automobiles.

Democratic lawmakers who want to attach the plan to President-elect Barack Obama's economic stimulus legislation said Thursday they had reached a deal with Citigroup Inc., which had opposed the plan. The agreement would allow the plan to move forward more easily.

The compromise between Citigroup and Sens. Richard Durbin of Illinois, Charles Schumer of New York and Christopher Dodd of Connecticut, would be limited to loans made before the bill is signed. Obama has said he backs the concept.

Borrowers would need to demonstrate that they have asked their lender for a loan modification before filing for bankruptcy.

Such legislation would particularly help Floridians. One in every 157 homeowners statewide received a foreclosure filing in October, the third-highest foreclosure rate by state, according to California-based RealtyTrac.

Schumer said he's received calls from several other lenders indicating their potential interest in supporting the plan.

"This is a breakthrough day," the senator said Thursday in a news conference on Capitol Hill. "We've been stymied because the banking industry opposed this simple provision, which is key to getting a floor to the housing market."

New York-based Citi did not comment on the announcement.

Advocates of the plan say it would prod the lending industry to be more aggressive about modifying loans. But the lending industry has battled fiercely against the idea, arguing it would force lenders to hike mortgage rates because they would have to charge more for loans that could be altered later by a judge.

"This would hurt the housing market at the exact time we're trying to stimulate it," said Scott Talbott, chief lobbyist at the Financial Services Roundtable, which represents large banks and insurance companies.

Locally, federal bankruptcy judge Michael Williamson said he likes the plan.

"The people living in upside down homes right now are filing for bankruptcy anyway to get rid of the deficiency," he said. "The question here is do they lose their homes, too. That would result in an empty house where no one is paying the taxes or the homeowners fees."