Senate Defeats Measure to Allow Bankruptcy Judges to Change Mortgage Terms

For the second time in two years, a provision to allow bankruptcy judges to modify mortgages died in the Senate today.

It is a significant defeat for an initiative President Obama has championed as a way to keep more borrowers in their homes. Senate Majority Whip Richard J. Durbin (D-Ill.), who sponsored the measure, has said it would help 1.7 million borrowers save their homes. But even after negotiating for weeks and weakening the measure significantly, Durbin failed to gain enough industry or Republican support.

"I'll be back. I'm not going to quit on this," Durbin said, noting that the estimate of how many people will be pushed into foreclosure 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," he said.

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."

The issue gained some momentum this year after Citigroup 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 cramdown was likely to be enacted and worked instead to limit its scope.

The measure ran into trouble in the House among moderate Democrats before ultimately passing that chamber. It faced an even tougher battle in the Senate. Durbin negotiated with Bank of America, J.P. Morgan Chase and Wells Fargo for weeks but failed to secure a deal.