By Kyle Chezum Updated on 2/1/2011

2/01/11

A Rhode Island senator, Sen. Sheldon Whitehouse, has crafted a bill that would allow greater room for borrowers in default to negotiate loan terms with their lenders under court supervision.  Bankruptcy courts would oversee the negotiations and discussions.  Whitehouse hopes this bill will lead to a higher number of successful mortgage modifications.

“Servicers too often act in their own fee-driven interests and not in the interests of the investors who actually hold the mortgages,” the senator said. “A court-supervised negotiation can ensure that servicers don’t reject reasonable settlements that would benefit investors.”

The bill is motivated by recent reports which showed banks can reap higher profits through foreclosing on a home than through modifying a failed mortgage.  Large banks are able to recoup more money faster through foreclosure sales, even though the sale of the distressed home is often lower than the full expected return on the loan.  The utter failure of the Obama Administration’s HAMP program is another major motivating factor.

Other economists and policymakers have expressed concerns that the bill will give bankruptcy courts too much power.  Iowa senator Charles Grassley fears that courts will take over many of the functions of lenders and force lenders to accept terms that are not profitable.  Similar legislation was brought up and rejected in 2009.  Grassley claims that Whitehouse’s bill robs lenders of more power than even the Obama Administration’s HAMP program, in which all modifications are federally backed.  The bill will likely discourage continued private investment into mortgages, detractors claim.

Still, as banks continue to reject mortgage modification opportunities, policy change grows more and more necessary.  Whitehouse’s bill may spark a change in the system that will keep more homeowners in their homes long term.