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Uncertainty on Cramdowns

Washington-The House approved legislation 234 to 191 that would let bankruptcy judges modify mortgages, but the bill's final fate remains unclear.

Though House leadership had enough of a majority to pass the bill over opposition from Republicans and several conservative Democrats, Senate leaders do not have as much leeway.

Some Senate Democrats, including Sen. Evan Bayh of Indiana, continue to push for ways to narrow the bill, encouraged by the banking industry, which says the legislation would drive up the cost of credit.

"Further compromise is coming in the Senate," said Brian Gardner, an analyst with Keefe, Bruyette & Woods Inc. "The Republican leadership will be able to keep their caucus unified, and that means Democrats can't afford to lose any of their members. And there could be a small number - and that's all you need - to force a compromise."

Senate Majority Whip Richard Durbin acknowledged recently that a compromise was necessary, but one has yet to emerge.

After Sen. Durbin told American Banker he would consider having the bill apply solely to subprime loans - a position he later reversed - House lawmakers delayed a planned vote last week on their version of the bill in an attempt to win more support.

But the bill voted on was little changed, including modified language designed to encourage borrowers to attempt to seek a loan modification from their lender before bankruptcy.

For example, if a servicer offered a borrower a loan modification, the homeowner would have to consider it before heading to bankruptcy court. The judge would retain the ultimate say in determining if the borrower acted in good faith and could still reduce the terms of the mortgage.

The borrower also would have to wait 30 days between trying to receive assistance from the servicer and going to bankruptcy.

The modified bill also included language that said instead of reducing principal, the judge could consider reducing the interest rate to 2% if that would bring the borrower's debt-to-income ratio to 31%, but the judge would not be required to adjust the loan in such a manner.

Industry representatives and Republican lawmakers said the changes did not go far enough.

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