The subject is generating plenty of noise and, despite some delays, still appears to have significant momentum, observers said. A bill on the topic is scheduled for a second hearing today in a House Judiciary subcommittee and is expected to come before the full panel for a vote at any time.

Meanwhile, top lawmakers in the Senate are close to a deal, an aide said. Senate Majority Whip Richard Durbin, D-Ill., and Sen. Arlen Specter of Pennsylvania, the top Republican on the Senate Judiciary Committee, introduced rival bills on the issue but have a tentative agreement for a bipartisan measure and are working with Senate Judiciary Committee Chairman Patrick Leahy, D-Vt., to schedule a hearing as soon as possible, the aide said.

The agreement, struck last week, would let bankruptcy judges reduce the value of mortgages to the property’s fair market value, according to the aide.

"They did reach an agreement on capping the cramdown at the maximum fair market value of the property in question," the aide said in an interview Monday. "From there, they agreed to work with Leahy’s staff … on getting a full committee hearing on the proposals."

But plans for Senate action are hard to pin down, and some argue that a deal is still out of reach. Bankruptcy advocates said they have heard that the two senators agreed to a compromise bill, while banking industry lobbyists insist they have no evidence that a deal has been cut.

A spokeswoman for Sen. Specter would not discuss the matter, but an aide for Sen. Durbin said: "It’s our hope that a bipartisan bill will move quickly through the Senate process, hopefully passing the Senate this year. The two senators have spoken and agreed to continue working on a bipartisan bill."

A Senate Judiciary aide said that the two senators have not formally requested a hearing yet, but the hope is that their bills would be negotiated into one first.

"There is a Durbin bill, and there is a Specter bill," the aide said. "Neither of them has asked for a hearing yet, and so there has not been one scheduled, but I think the hope would be that they could make it come together as one bill at some point."

Crafting a single bipartisan bill likely would be a critical turning point. Industry representatives have hoped that Republicans would work with them to oppose a bill in the tightly divided Senate. But a bipartisan bill could either gain momentum on its own or be attached to other pieces of legislation and passed this year.

In the House, the time frame for voting on bankruptcy also is dicey. A vote on the bill before the House Judiciary Committee was delayed last week, and a House aide said Monday that the goal of bill supporters was to find a way to broaden support among Republicans and conservative Blue Dog Democrats before advancing the bill through the committee.

Though the situation remains in flux, industry lobbyists said bankruptcy reform remains their most pressing legislative threat, because it has a fair chance of enactment this year and could affect the terms of all outstanding and future mortgages.

"Bankruptcy presents the most problems for its immediate impact on the industry," said Scott DeFife, the senior managing director of government affairs with the Securities Industry and Financial Markets Association. "The bill as reported from the subcommittee applies to all facets of the mortgage market, not just subprime. It applies retroactively as well as prospectively. It’s a fundamental change in the laws that have underpinned mortgage finance for the last three decades … and that’s why it’s the most immediate of the concerns."

At the hearing set for today, the Mortgage Bankers Association plans to argue that such legislation could destabilize the entire mortgage industry by driving up costs for all borrowers and increasing uncertainty for lenders.

But Mark Zandi, the chief economist and co-founder of Moody’s Economy.com Inc., who is also scheduled to testify, disagrees with that assertion. He said that a change in the Bankruptcy Code likely would have only a minimal effect on how lenders account for such risk in pricing and is necessary to prevent a worse economic decline spurred by millions of foreclosures.

"The proposal for allowing the cramdowns on first mortgages is a good idea," Mr. Zandi said. "I think it will keep a large number of homeowners out of foreclosure at low cost to lenders and others in the industry."

He dismissed the idea that the bill would lead to higher mortgage costs.

"Other debt has the same sort of cramdown feature, and those markets work very well," Mr. Zandi said. "I guess the onus would be on those who suggest that this would be very costly, because there is no evidence of that, as far as I can tell."

But he also said the bill before the House Judiciary Committee, sponsored by Reps. Brad Miller, D-N.C., and Linda Sanchez, D-Calif., could benefit from some tweaks that would limit the duration of the bill’s enactment and provide more clarity about how bankruptcy judges could restructure loans.

"It has to be made clearer to the judge what kinds of things could be done in terms of what is the appropriate interest rate, what is the maturity of the loan — give the judge a lot of guidance with respect to all of that," Mr. Zandi said. "It should be made very clear to everyone what is being talked about here, and as explicitly as possible outline how do you determine market value, through an appraisal process, and exactly how that would work. … All of those kinds of things would have to be clearly spelled out."

But Kurt Pfotenhauer, the lead lobbyist for the MBA, said that proponents of bankruptcy reform and industry representatives who oppose it are fundamentally at odds on how the bill would affect the mortgage market.

"We are having a disagreement on economics. We really think that if this law is changed, it will cause a significant repricing of mortgages, and I think proponents don’t believe it," he said. "If a judge can cram down on a lender’s debt and can change the terms of a loan, then it brings a real question as to what the value of the collateral is, and it has to be priced differently."

Changes to the bill might help, Mr. Pfotenhauer said, but he was unsure there was a way to make it palatable.

"Any narrowing of the bill makes a bad bill less bad, but it doesn’t make a bad bill good," he said.

Via American Banker