A dispute among House Democrats stalled legislation Thursday to let bankruptcy judges reduce the principal and interest rate on mortgages for debt-strapped homeowners.
The measure, backed by President Barack Obama, is the most controversial part of a broader housing package that had been expected to pass the House this week.
It hit a snag after a group of moderates expressed concerns in a closed-door meeting of House Democrats about how the bill would affect homeowners who are still struggling to make their mortgage payments.
The banking industry has lobbied hard against the measure, mounting a successful multimillion-dollar effort last year to kill it.
This year, mortgage industry players who are scrambling to narrow the scope of the measure to reduce its potential cost for banks have won some key concessions. House Democrats agreed to limit the measure to existing loans made before the bill is enacted and to borrowers who can show they tried other ways of modifying their home loans before resorting to bankruptcy, among other changes.
But banks want to go much further, restricting the bill only to subprime or other exotic loans.
Centrist House Democrats who have been working closely with the financial services industry to scale back the bill balked at supporting it on Thursday after a news report suggested that Sen. Dick Durbin, D-Ill., the lead sponsor of the bankruptcy measure in the Senate, was willing to limit it only to subprime mortgages. The Senate is expected to take up the legislation within two weeks.
In the House, Rep. Ellen Tauscher, D-Calif., the head of the business-minded New Democrat Coalition, raised concerns during the private session that the measure omitted help for homeowners who aren't staring at bankruptcy but are buckling under burdensome mortgage payments.
House leaders said they had postponed a vote until Tuesday to give Democrats time to meet with Obama's housing secretary, Shaun Donovan, about how the measure fits with his housing plan.
"There's an equity question here," said Rep. Ed Perlmutter, D-Colo., another member of the coalition. "The discussion has got to be, what's the benefit to the guy next door who is struggling to pay the bills, is paying the bills and isn't filing for bankruptcy?"
Democratic skeptics are worried "that this could be too hard on the banks," said Rep. John Conyers, D-Mich., the Judiciary Committee chairman who sponsored the bill.
Consumer advocates and most Democrats regard the measure as crucial to slowing the rapid rate of foreclosures. They say it's the only way to force mortgage holders — known as loan servicers — to take steps to help homeowners stay in their homes.
The mortgage industry contends, however, that the measure will impose steep and unpredictable costs on its companies, which will be forced to raise fees and interest rates for borrowers. Opponents, including most Republicans, call it the "cram-down."
Separately, Donovan told senators Thursday that limiting the measure to loans that have already been made should alleviate concerns that lenders would be forced to charge higher interest rates to compensate for the additional risk of a potential "cram-down."
"The idea is not to have an impact on lenders that are out making loans today," Donovan said.
In the House, the bankruptcy measure is part of a broader housing plan that also would raise the Federal Deposit Insurance Corporation's borrowing authority and take other steps to prevent foreclosures. It contains several sweeteners for the mortgage industry designed to prod servicers to allow struggling homeowners to modify or refinance their home loans to bring down their monthly payments.