Senate Defeats Mortgage ‘Cram-Down’

For the second time the mortgage industry as succeeded killing the proposed bill as the U.S. Senate rejected a measure that would let bankruptcy judges cut mortgage terms to help borrowers avoid foreclosure; A big defeat for struggling homeowners, but a big victory for banks and credit unions that said the legislation would increase loan costs.

The proposed “cram-down” amendment to a housing bill was defeated today in a 51-45 vote, with 12 Democrats among the 51 opponents. The measure needed 60 votes to pass over Republican objections. The House passed its version 234-191 on March 5.

“These bankers who brought us into this crisis are literally shunning and stiff-arming the people who are facing foreclosure,” said Senator Richard Durbin of Illinois, sponsor of the legislation and the chamber’s second-ranking Democrat who introduced the bill back in 2007.

The defeat is also a setback for President Barack Obama’s administration, which included cram-down in the anti-foreclosure plan aiming to help 9 million homeowners.

Democrats led by Durbin had sought a compromise on the measure with JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp., the American Bankers Association and Financial Services Roundtable. The lenders that scuttled the negotiations are “surviving today because of taxpayers’ dollars,” Durbin said. The three banks he named received $95 billion in U.S. aid.

Durbin had proposed limiting the size of mortgages eligible for modification by judges, and his proposal would have covered loans issued through Jan. 1 or delinquent for 60 days. A provision in the legislation also would have required borrowers to contact loan servicers 45 days before filing for bankruptcy.

A coalition of 12 financial industry groups, in a letter to senators yesterday, said the cram-down bill would destabilize the housing market. The Democratic effort lost support last week after federal credit unions refused to endorse the legislation.

The U.S. economy has lost 5.1 million jobs since December 2007, and unemployment rose to 8.5 percent in March, the highest since 1983. Consumers remain burdened by debt, as foreclosure filings for March totaled 341,180, a record high, according to RealtyTrac.

Source: Bloomberg
To contact the reporter on this story: Margaret Chadbourn in Washington at mchadbourn@bloomberg.net.