By Renae Merle
Washington Post Staff Writer
Tuesday, April 28, 2009
Days before an expected vote, Senate leaders yesterday touted their version of a proposal to allow bankruptcy judges to modify mortgages, but have yet to secure the support of the financial services industry and face fierce opposition that could derail the proposal again.
Senate Majority Whip Richard J. Durbin (D-Ill.) has been negotiating with Bank of America, J.P. Morgan Chase and Wells Fargo for weeks. They are facing increasing pressure to conclude negotiations before a Senate vote later this week, but talks continue, according to Senate aides.
"I hope we can muster the courage and find the votes, although I know it will be hard," Durbin said on the Senate floor yesterday. Durbin has been pushing the measure for more than two years. "It's hard to imagine that today the mortgage bankers would have clout in this chamber, but they do."
Under the measure, a key part of President Obama's housing plan, a bankruptcy judge could modify the terms of a troubled mortgage, including lowering the principal owed by the borrower. It's a process known as a cramdown. Citigroup backed the proposal earlier this year, giving it momentum. But the legislation has been stalled in the Senate for more than a month. It passed the House in March.
Despite the ongoing negotiations, Senate aides said the section covering bankruptcy modification is near completion. It would weaken the bill by requiring homeowners to be two months delinquent and have an outstanding balance of less than $729,750 to qualify. If a bankruptcy judge lowers the principal balance, the borrowers would have to split any profit with the lender if they sold the home while still in bankruptcy proceedings.
The current proposal would also restrict the ability of homeowners to receive a bankruptcy modification if their lender has offered them a loan modification similar to those in a government program being put in place. "This amendment limits assistance in bankruptcy to situations where lenders are so intransigent that they are unwilling to cooperate with the foreclosure prevention efforts already underway," Durbin said.
The negotiations are focused on other parts of the legislation, not the bankruptcy-modification provision, according to Senate aides. "We have come up with a bankruptcy proposal that is so air tight, we're confident in the proposal," one of the aides said.
However, the compromise version of the bankruptcy-modification provision is still too broad, said Scott E. Talbott, senior vice president of government affairs for the Financial Services Roundtable, an industry group. "The uphill battle that the bill has faced for years has continued. It will be very difficult to garner the votes," he said.
Durbin had hoped to secure the support of the major lenders, which industry officials said is increasingly unlikely.
The bill is expected to come up for a vote Thursday, but what form it will take is unclear, the Senate aides said. A housing bill could be introduced without the bankruptcy provision, for example, forcing Durbin to introduce it as an amendment.