Among Democrats, a rift over siding with banks

Twelve Democratic senators joined a united GOP on Thursday to prevent bankruptcy judges from being allowed to rewrite mortgage terms for homeowners facing foreclosure.

Democratic Sen. Richard Durbin of Illinois, pictured with House Speaker Nancy Pelosi last year, introduced a measure that would have let bankruptcy judges alter the terms of underwater mortgages. The measure was defeated on Thursday, when 12 democratic senators broke ranks to side with the GOP and banking industry.

With Sen. Arlen Specter exiting the GOP this week, Senate Democrats appeared to be one Minnesota recount away from an unassailable supermajority – that is, until they lost 12 of their own on a key housing vote.

It’s a reminder that Senate votes come one at a time – despite what the fundraising appeals on both sides of the aisle say about getting to that game-changing 60-vote threshold.

The 45-to-51 vote also uncovers a significant rift in the Democratic majority’s ranks on a defining issue: How far to accept the finance industry’s view of the nation's economic crisis and its solution.

At issue in the vote was whether to empower bankruptcy judges to rewrite mortgages to help families avoid foreclosure. The amendment, sponsored by Senate majority whip Richard Durbin, adds bankruptcy reform to a housing and consumer protection bill that enjoys bipartisan support.

The underlying bill increases borrowing authority for the Federal Deposit Insurance Corporation to $100 billion, up from $30 billion, and makes permanent a temporary increase for FDIC deposit insurance to $250,000, up from $100,000 last year. It also expands access to the $300 billion Hope for Homeowners program. Courts can now write down the interest or principal on vacation homes, yachts, and other big-ticket items involved in bankruptcy proceedings, but not on primary homes.

Banking industry lobbyists favor the bill but strongly opposed Durbin's amendment, which they dubbed “cramdown.” It’s sure to “raise mortgage costs for consumers,” said the Mortgage Bankers Association in the runup to Thursday's vote. Bankers say that if a court can lower interest rates or the principal owed on a mortgage, then it follows that banks will have to take that new risk into account when they price new mortgages — and the cost of borrowing will be higher for all consumers.

Senator Durbin negotiated with banks and consumer groups for months before Thursday’s vote, but negotiations broke down, he says. But the biggest blow to Senate Democrat leadership was the depth of opposition in their own party's ranks.

“We won’t get out of this recession until we deal honestly and forthrightly with this foreclosure crisis. And I just don’t know what it will take to bring people around to the belief that these bankers don’t have the right formula for the future of this country,” said Senator Durbin.

“I am sick and tired of being asked to give billions of dollars to these banks when they won’t in any way help people facing mortgage foreclosure,” he added, at a leadership briefing on Thursday.

“They’re not renegotiating these mortgages. If they have no sympathy for 8 million families facing foreclosure in this country, I don’t have any sympathy for them.” Durbin says that he won’t support any further requests for taxpayer bailouts for banks under the Troubled Asset Relief Program (TARP).

"This is an issue that Democrats, Republicans, independents in the country want something done [about], and I feel kind of sorry for senators that don’t support this legislation, because I think [that] can really backfire," said Senate majority leader Harry Reid, also at the briefing.

But the dozen Democrats who voted with a unified Republican caucus on the issue saw it differently.

“The cramdown approach sounds real good, but I don’t think that anybody in the business of lending will be able to determine what they have in the way of mortgages if a judge can come along and make all kinds of changes to the mortgages,” says Sen. Ben Nelson (D) of Nebraska, who voted against the Durbin amendment.

“It potentially raises the rates for all the folks who don’t end up in bankruptcy. The cost shift is something that I’m quite concerned about. We’ve had banks back home raise the question. I don’t know anybody back home who’s for it,” he says. But he adds that he wasn't pressured very hard on the issue by banks.

Delaware Sens. Thomas Carper and Ted Kaufman, both Democrats from the state that launched the credit card industry, split on the vote.

Freshman Senator Kaufman, who voted for the Durbin amendment, said that it bothered him that current law allows judges to modify loans for automobiles and second homes but not for primary residences. “Why should a home be treated any differently than any other asset under bankruptcy?” he said. “I’m going to look at every individual vote and call them as I see them.”

Senator Carper, who opposed the amendment, says that “one of the reasons why mortgage rates are cheaper for primary homes is that the markets have the certainty that the judge won’t be invited in to change the terms of the mortgage.” Responding to claims that banks own the Senate, he said: “The banks sure don’t think so.”

A new Gallup poll, released April 23, reports that the percentage of Americans saying they have a "great deal" or "quite a lot" of confidence in US banks has fallen to 18 percent – down 14 percentage points from a June 2008 Gallup poll and 23 points from a June 2007 poll.

“To think that [banks] have clout in this chamber to dictate what we’re going to do in terms of mortgages and foreclosures really troubles me,” says Durbin.

“They spent $60 million in the last campaign…. They have the lobbyists; they have the people on the phones, they’re the ones who were working to defeat this amendment. Make no mistake about it: That’s where the opposition comes from. I can’t match what the bankers did in terms of lobbying,” he says.

The banking industry supports the underlying bill, a version of which passed the House on March 5. But industry lobbyists say that the Durbin amendment was a "poison pill" that would have scuttled the bill.

“The bankers really recognized that Senator Durbin was offering his proposals in very good faith, but we didn’t see how that proposal was going to get the deposit insurance provisions [in the underlying bill] enacted into law,” says Steve Verdier, director of congressional affairs for the Independent Community Bankers Association of America, which participated in the negotiations.

Banks objected to “cramdown,” because of the “precedent it sets for mortgages that might be made in the future or affected by a future Congress,” he adds.

“I think Obama has a pretty good plan on the table, and it’s just going to take some time. The economy is going to have to get better so that people can make even reduced terms on their mortgages. If they’re not working, they can’t even make reduced payments,”says Mr. Verdier.

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