Senate Rejects 'Cramdown' Relief on Mortgages

The U.S. Senate has rejected legislation that would have allowed bankruptcy judges to reduce the principal owned on a homeowner's mortgage, a measure known as "cramdown."

A dozen Democrats joined Republicans in voting to reject the amendment, which failed 51-45. The measure, which had the backing of the Obama administration, was strongly opposed by the banking industry.

The measure would have allowed judges in bankruptcy proceedings to reduce the terms of a mortgage on a homeowner's primary residence in order to avoid foreclosure. Currently, judges in bankruptcy courts may order reductions of other types of debt, including mortgages on vacation homes, but not on a primary residence.

Banks say would make loans more costly

With the decline in the housing market, many homeowners in financial difficulty owe more on their mortgage than their home is worth or that a lender is likely to be able to recover in foreclosure. However, the banking industry said the measure would have forced them to raise the price of loans borrowers and made it more expensive for other borrowers to buy a home.

"Congress and the Administration have taken several strong steps to help troubled borrowers and get our economy back on track," said American Bankers Association Executive Director Floyd Stoner said in a statement. "Giving bankruptcy judges broad cramdown authority would work against those efforts and effectively undermine the goal of stabilizing the housing market."

Would likely spur loan modifications

The Obama administration had sought the legislation as a supporting element of its Making Home Affordable mortgage modification program. That program offers various financial incentives to lenders to modify mortgages for financially troubled homeowners; adding the possibility of a cramdown in bankruptcy court would likely have spurred more lenders to grant such modifications.

The sponsor of the legislation, Sen. Dick Durbin (D-Ill.), had met with representatives of the banking industry numerous times in recent weeks in an attempt to work out a compromise, cutting back several of the bill's original provisions. But among major lenders, only Citibank supported the amendment.

Sponsor says he'll try again

Sen. Durbin, who introduced similar legislation in 2007, has said he intends to bring the issue before the Senate again.

He may yet succeed. The House has already approved its version of the legislation, which could be revived in House-Senate negotiations over broader banking legislation. Worsening economic conditions could also build support for reviving the measure in the Senate, or make a House-Senate compromise more likely.