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Senate Defeats Measure to Allow Bankruptcy Judges to Change Mortgage Terms

By Renae Merle
Washington Post Staff Writer
Thursday, April 30, 2009 5:35 PM

For the second time in two years, a provision to allow bankruptcy judges to modify mortgages died in the Senate today, handing the Obama administration a significant defeat in its plans for arresting the foreclosure crisis.

Supporters argued the measure would keep 1.7 million borrowers in their homes, but it ultimately foundered in the face of fierce financial industry and Republican opposition. The bankruptcy modification provision, which was offered an amendment to a broader housing bill, failed by a vote of 45 to 51.

"I'll be back. I'm not going to quit on this," said Senate Majority Whip Richard J. Durbin (D-Ill.), who sponsored the measure. He noted that estimated foreclosures during the housing crisis has ballooned from 2 million to 8 million since his campaign for the change to the bankruptcy code began.

"At some point the Senators in this chamber will decide the bankers shouldn't write the agenda for the United States Senate. At some point the people in this chamber will decide the people we represent are not the folks working in the big banks, but the folks struggling to make a living and struggling to keep a decent home."

The measure would have allowed bankruptcy judges to modify troubled mortgages, lowering the interest rate or principal balance, a process known as a cramdown. Bankruptcy courts can already make those changes for a second home or investment property, but not a primary residence.

"We're saving vacation homes. We're saving automobiles. We're saving all of these other assets," said Sen. Barbara Boxer (D-Calif.). "But the main thing we should be saving, the residential home, is not allowed to be brought up in bankruptcy."

Added Sen. Charles E. Schumer (D-N.Y.): "It is confounding that the banks opposed this to the very end since the proposal would have helped them by finding a floor in the housing market. Clearly the banks had enough clout to defeat this bill, certainly more than the 1.7 million homeowners who would have been helped by it."

The issue gained some momentum this year after Citigroup, the troubled New York bank, broke with the rest of the financial services industry and threw its support behind the provision. Even some financial services industry executives privately acknowledged that bankruptcy modification appeared likely to become law. The Obama administration characterized the measure as the stick in its housing program that would encourage lenders to help borrowers stay in their homes.

But the measure ran into trouble in the House among moderate Democrats before ultimately passing that chamber. Then it faced an even tougher battle in the Senate. Durbin negotiated with Bank of America, J.P. Morgan Chase and Wells Fargo for weeks, hoping their support would bridge the gap. Even after the proposal was weakened significantly, the financial services industry refused to sign on.

"Instead of encouraging homeowners who are at risk of foreclosure to file for bankruptcy, the federal government should continue to encourage lenders to work with owners to modify loans where it is economically viable for homeowners to remain in their homes," Republican Whip Sen. Jon Kyl (R-Ariz.) said. "While it is regrettable that not all homeowners are eligible for a loan modification, Congress should not incentivize bankruptcy by making it the only means to save one's home."

The bankruptcy modification measure was introduced as an amendment to a larger housing bill, which also includes a revamp of Hope for Homeowners, a government program to allow borrowers to refinance into more affordable loans. The larger bill also provides a safe harbor provision for mortgage servicers, which manage pools of loans for investors and lenders, from lawsuits related to modifying a loan. A coalition of investors has complained the measure is unnecessary and would protect mortgage servicers from unrelated misdeeds.

The safe harbor provision could "create a loophole whereby banks escape serious liability for their predatory lending and fraudulent loan originations," John Taylor, president of the National Community Reinvestment Coalition, said in a letter to lawmakers yesterday.

The Senate has not scheduled a vote on the rest of the housing bill, but it is not expected to come up immediately.

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