Leading Democrat offers U.S. mortgage aid bill

WASHINGTON, Jan 6 (Reuters) - The second-ranking Democrat of the U.S. Senate on Tuesday introduced legislation that would let bankruptcy judges erase some mortgage debt in an effort to stem foreclosures.

The bill drafted by Sen. Richard Durbin would help millions of families avoid foreclosure by easing their monthly payments, the Illinois lawmaker said in a statement.

"After committing over $1 trillion in taxpayer money to address the financial crisis, why don't we take a step that would indisputably reduce foreclosures and that would cost taxpayers nothing?" Durbin, the Senate Democratic whip, said in a statement.

A similar plan failed in the Senate last spring as President George W. Bush and many Republican lawmakers opposed it, but supporters of 'mortgage cram-down' believe that they will prevail as the housing crisis has deepened and President-elect Barack Obama prepares to take office.

OPPOSITION AHEAD

While the financial services industry is generally opposed to the reform, many consumer-rights advocates have come out in support of the plan that would give courts the same broad power to rewrite home loans as they can do for other debts.

"Reasonable and limited reforms of the bankruptcy laws would allow judges to readjust debt owed on primary residences, just as they can for vacation homes and family farms," 21 state attorneys general wrote on Tuesday in a letter to Congress.

While a national housing crisis has worsened in the last 12 months and foreclosures have climbed to record levels, the lending industry has warned that changes to bankruptcy law could stifle credit.

"The bills will increase the cost of borrowing for a home, at the exact moment we need home sales to restart," said Steve Bartlett, president of the Financial Services Roundtable.