Durbin pushing plan to help foreclosure crisis

WASHINGTON -- Bankruptcy judges would be allowed to come to the aid of homeowners facing mortgage foreclosure under a proposal pushed by Illinois Sen. Dick Durbin.

The Senate's second-highest ranking Democrat planned to put his bill in the spotlight Wednesday at a Senate Judiciary Committee hearing that will include testimony from Nettie McGee, a 73-year-old Chicago woman threatened by foreclosure.

Under the plan, a bankruptcy judge could change the mortgage of a primary residence, including lowering an adjustable interest rate to a lower, fixed rate. Already, the judges can do that with loans for cars and a host of other debts.

Durbin estimates his bill could help an estimated 600,000 of about 2.2 million families in the U.S. at risk of losing their homes because of rising adjustable mortgage rates.

"A strategic change in the bankruptcy code will provide homeowners facing foreclosure a degree of financial stability -- even when the market cannot," Durbin said Tuesday.

Durbin said mortgage foreclosures are a problem nationally, but a crisis in Illinois, where nearly 50,000 families are at risk of losing their homes. He said foreclosed homes also can lower neighborhood property values.

The foreclosure crisis is blamed on too many sub-prime interest loans, often called "teaser rates" because they lure buyers with low rates subject to a much higher adjustment.

Supporters of Durbin's bill include senior citizens, bankruptcy attorneys, the AFL-CIO and the NAACP. The American Bankers Association and homebuilders are among opponents.

Floyd Stoner, a leading lobbyist for bankers, said bankruptcy judges lack expertise to redetermine a loan's size, value and length, and that means a "chilling effect" on future lending.

"This will introduce more risk for the elderly by creating uncertainty about when and if a loan will be repaid," he said. "By adding more doubt about the value of the collateral underlying a mortgage loan, lenders will not be able to appropriately price risk.

Andy Miofsky, a Granite City, Ill., attorney who specializes in bankruptcy cases, said the Durbin bill in necessary because voluntary efforts won't solve anything.

His clients confront adjustable mortgage rates that can increase 5 to 7 percentage points, causing monthly mortgage payments to jump by $1,000 or more, he said.

"You need some congressional legislation and some judicial finality in this situation," he said. "What better person than a judge to decide relief?"