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Foreclose vs. resetting mortgages: the fight goes on

The Senate nears a vote on a bill to help ease the foreclosure crisis, as banking and real estate lobbies successfully resist efforts to let courts adjust terms of mortgages.

By Staff writer / May 5, 2009

This home is in California's Inland Empire area, which has been hit hard by the housing crash. Congress is moving closer to enacting a law that could help many families facing foreclosure.

Dan Whitcomb/Reuters



Congress is moving closer to enacting a law intended to ease a foreclosure crisis affecting more than 8 million families, not to mention the powerful financial services and real estate industries.

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But the legislation that will come before the Senate, possibly as soon as Tuesday, will not contain all that President Obama wanted – namely, new authority for bankruptcy courts to rewrite the terms of mortgage loans on individuals' primary homes. That piece of the measure died last week, in a fractious vote that drove a wedge in the Democratic majority and, some say, revealed the immense power of the banking and real estate lobbies in Washington, which opposed it.

A more charitable view is that the coming vote will test lawmakers' willingness to pit their own views on how best to resolve the housing-led financial crisis against the views of the banking industry.

While the banking industry fought giving mortgage-rewrite power to bankruptcy judges, it supports much that remains in the bill, such as raising borrowing authority for the Federal Deposit Insurance Corp. to $100 billion, up from $30 billion, and permanently increasing FDIC deposit insurance for Americans to $250,000, up from $100,000 last year.

If the Helping Families Save Their Homes Act passes the Senate without the mortgage-rewrite amendment, that provision could yet be added to the bill during conference negotiations with the House. A comparable bill, including the bankruptcy reform provision, cleared the House on March 5 by a vote of 234 to 91.

During negotiations last week over the contentious loan-modification amendment, banks did win some concessions from Democratic lawmakers.

“We gave [the banks] extraordinary leeway in terms of deciding whether a person could raise this in bankruptcy court,” says Senate majority whip Richard Durbin (D) of Illinois, who led the negotiations.

These included requiring that homeowners try to renegotiate terms with the bank at least 45 days in advance of seeking relief in the courts, limiting the kinds of mortgages to be covered by bankruptcy reform, and precluding homeowners from going forward in bankruptcy if the mortgage lender made a good-faith offer of renegotiation.

In the end, though, the sweeteners were not enough to win the industry's support for the amendment. “We added all these things at the request of the banking institutions, and they said: 'Fine, we leave. We’re not part of this.' They walked away,” Senator Durbin says.

Courts are already allowed to write down the terms of loans on secondary homes, yachts, and other big-ticket items involved in bankruptcy proceedings, but not on an individual's primary residence. As a candidate, Mr. Obama campaigned to change that by allowing bankruptcy judges to rewrite mortgages for primary homes, too.