Senate defeats bid that would have let homeowners seek foreclosure relief in bankruptcy court

Senate votes down foreclosure bill

WASHINGTON — The Senate has defeated legislation that would have let hundreds of thousands of debt-ridden homeowners seek mortgage relief in bankruptcy court.

President Barack Obama had said the bill was important to saving the economy and promised to push for its passage. But facing stiff opposition from banks, Obama did little to lean on lawmakers who worried it might spike interest rates.

The bill would have allowed bankruptcy judges to rewrite a person’s mortgage terms, if a bank refused to offer better terms based on income and home value. Only 45 senators voted in favor of the bill, with 51 senators opposed.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

WASHINGTON (AP) — With President Barack Obama largely on the sidelines, Senate Republicans are poised to defeat his promise of a bankruptcy court refuge for hundreds of thousands of families about to lose their homes to foreclosure.

The vote would mark the first major legislative setback for the popular president, who supported the legislation and whose administration has made saving the economy its No. 1 priority.

“The banks that are too big to fail are saying that 8 million Americans facing foreclosure are too little to count in this economy,” said Senate Majority Whip Dick Durbin.

Durbin, D-Ill., led efforts in the Senate to pass the bill, but the Obama administration focused instead on less divisive legislation that would limit fees charged by credit card companies and pushed job creation through the president’s $787 billion economic stimulus plan.

Obama long has backed the proposal to give debt-ridden individuals the option of turning to bankruptcy to save their homes. He cited that support last fall as he privately lobbied skeptical Democrats to back the $700 billion Wall Street bailout. And once he was president, he had promised, he would push through the bankruptcy measure.

In February, the newly elected president included the proposal as the stick in a housing plan full of carrots for the banking industry. The broader rescue plan encouraged, but did not require, lenders to cut homeowners’ monthly payments and refinance loans for individuals whose home’s market value has sunk below what they owe.

The following month, the House passed the bankruptcy legislation along party lines in a 234-191 vote.

But as momentum on the legislation stalled in the Senate, where 60 votes are needed to overcome procedural hurdles, the new administration did little to nothing to combat the aggressive banking lobby fighting the bill.

A Treasury Department spokeswoman and White House spokeswoman did not respond to requests for comment.

Obama supporters blame the banks.

“There was a lot of fear-mongering,” said Andrew Jakabovics, associate director for housing and economics at the progressive Center for American Progress in Washington. “The banks put on a good show, saying, ‘Hey, if you force us to take more losses, we’re going to go out of business.’”

Indeed, the banking industry had a direct line to Capitol Hill. Officials from some of the biggest banks, including JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co., as well as groups representing credit unions and community banks, negotiated for weeks with Durbin and other leading Senate Democrats to try to strike an accord.

Officials involved in the negotiations said Durbin agreed to narrow the provision substantially in a bid to win their support. The latest proposal would restrict eligibility to homeowners already in foreclosure whose lender had not offered them better terms. Homes would also have to be worth less than $729,000 and apply to mortgage loans originated before 2009.

Some financial officials jumped on board, saying they would lose money anyway if a home fell into foreclosure. Lobbyists also calculated that it might be wise to swing behind the narrowly written legislation, rather than swallow a broader proposal later that might surface if the economy worsens.

But at the end of the day, Democrats did not get their endorsement. And several lawmakers said they remained worried that the forced easing, or “cram-down,” of mortgage terms would unleash a torrent of bankruptcy filings and ultimately drive up interest rates.

“The housing market is already unstable and enacting cram-down legislation would make things worse by adding even more risk to the mortgage market, effectively undermining efforts by Congress and the administration to stabilize housing,” a dozen financial groups, including the American Bankers Association and U.S. Chamber of Congress, wrote to senators Wednesday.

Lawmakers also were under pressure from constituents wary of the flurry in government spending, including hefty bailouts for banks, and what the bill might do to their credit lines.

“Do I want to have my rate go up so that somebody else might be able to cram down” their mortgage payment? said Sen. Ben Nelson, D-Neb., an opponent of the bill.

Congressional aides acknowledged this week that momentum was not on their side, and lawmakers said they were considering their next move. It was unclear whether Obama would try to wade into the debate or if he sees the foreclosure plan as a losing proposition.

“We’ll try again,” said Sen. Chuck Schumer, D-N.Y.

Associated Press writer Julie Hirschfeld Davis contributed to this report.