Capitol Hill housing and mortgage lobbyists were buzzing last week about an aggressive new legislative proposal that could put tens of thousands of financially-stressed home owners into loan modifications, even if their lenders and loan servicers had to be dragged kicking and yelling to the negotiating table.

Under the new bill, which was sponsored by four Democratic senators active in housing issues, all lenders and servicers operating in the U.S. would be prohibited from foreclosing on home owners unless they had discussed reasonable modification options with the borrowers.

Lenders who didn't comply would be hit by stiff fines and other legal penalties.

Even more significant -- all lenders would be required to perform what the bill calls a “net present value” test for every seriously delinquent borrower -- that is, a financial analysis weighing the financial benefits of a modification of loan terms, compared with those of a foreclosure.

If the net present value of a modification exceeded that of a foreclosure, lenders would be required by federal law do so.

For borrowers unable to handle the payments offered under a modification plan, the bill would create a multi-billion national fund for states to make loans or grants to prevent foreclosures.

The bill, called the Preserving Homes and Communities Act, was authored by Rhode Island Senator Jack Reed, a senior banking committee member. It's co-sponsors include Illinois Senator Dick Durbin, Jeff Merkey of Oregon and Sheldon Whitehouse of Rhode Island.

The senators said they plan to push the legislation hard because they're frustrated by the slow pace of loan modifications in the face of record numbers of foreclosures this year.

“Voluntary efforts to keep families in their homes have failed,” said Durbin. “This bill will force lenders to modify qualified mortgages” rather than letting them move quickly to foreclosure, which destroys households and neighborhoods.

The mortgage payment assistance program created by the bill would provide money to state housing agencies to set up revolving funds to assist people who've lost income in the recession and now face the imminent loss of their house.

Federal and state funds could provide gap financing to get people past their problems -- or outright grants -- to help them avoid foreclosure.

The bill would also fund state and local programs that create “mandatory mediation” requirements. Lenders would have to allow mediation efforts between themselves and their borrowers before filing foreclosures against home owners.

Though certain to be opposed by banking and mortgage lending groups, the new proposal could get serious traction in the Senate, and is virtually certain to get strongly support in the heavily Democratic House.

Published: October 5, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.