The U.S. Senate has voted down legislation that would allow bankruptcy court judges to modify the interest rate, terms, or even principal balance owed on primary-residence mortgages. After passing by a good margin in the House in early March, the cramdown bill failed in the Senate on Thursday by a vote of 45 to 51.
Proponents of the measure argue that it would keep an estimated 1.7 million borrowers from losing their homes. But the mortgage industry and virtually all banks – save Citigroup – strongly oppose the legislation and lobbied hard against it. They say it would increase mortgage costs and further diminish credit availability, while encouraging troubled homeowners to file for bankruptcy.

Sen. Richard Durbin (D-Illinois) sponsored the legislation, and says he’s not giving up on it. He says he will continue to bring the issue to the Senate floor until it gains enough support to pass. Durbin said, “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.”
One of the dissenting votes, Sen. Sam Brownback (R-Kansas) said he was pleased the cramdown legislation was defeated in the Senate. “While I certainly sympathize with homeowners who are facing foreclosure, allowing bankruptcy judges to cram down on interest rates or principal for delinquencies is not the right approach to solving this problem,” Brownback said. “This approach would result in higher interest rates and fees across the housing industry. Allowing judges to cram down on mortgages is a bad precedent to set, and my colleagues were wise to reject the amendment.”
The bankruptcy cramdown was introduced as an amendment to Congress’ larger housing reform bill, which also includes a revamping of the Federal Housing Authority’s (FHA’s) Hope for Homeowners program and a safe harbor provision to protect mortgage servicers against lawsuits from investors. The Senate has not scheduled a vote on the primary mortgage bill.