Senate drops plan for mortgage aid

WASHINGTON — Republicans and business-friendly Democrats on Thursday scuttled a plan to give people threatened with losing their homes more leverage in winning favorable loan terms from their lenders in bankruptcy courts.

The Senate killed the bankruptcy plan by a 58-36 vote on the first full day of debate on a bill designed to boost the slumping housing market.

The Democratic-backed bankruptcy law changes, opposed by banks and their GOP allies and a handful of Democrats, would have given judges the power to cut interest rates and principal on troubled mortgages to help desperate borrowers trapped in subprime mortgages keep their homes.

The idea was to give borrowers duped into abusive mortgages leverage in getting their loan terms adjusted. Such power, said the plan's chief proponent, Sen. Dick Durbin, D-Ill., would have helped "more people than all of the provisions combined" in the rest the bill.

But Republicans and 10 Democrats, along with Connecticut independent Joe Lieberman, voted to scuttle the bankruptcy provision. Opponents argued that, despite modifications by Durbin, the proposal would hurt more than it would have helped by leading mortgage lenders to ratchet up interest rates and thereby put another drag on the soft housing market.

Republican Sens. Orrin Hatch and Bob Bennett of Utah opposed the bankruptcy provision.

"The Durbin amendment would have allowed bankruptcy judges to modify mortgage terms in ways that create potential costs that would outweigh the possible benefits," Bennett said. "Giving bankruptcy judges this power will increase interest rates, making it harder for first-time homebuyers to enter the market and harder for existing owners to refinance."

Hatch said the amendment "would bring long-term distress to future homebuyers, who would face significantly higher interest rates as a result."

John Norman, executive director of the Utah Mortgage Lender's Association said that if the change went forward, it would create higher risk for investors on primary residences. Under current law, bankruptcy judges can already adjust the amount of second home or auto loans, which is why interest rates on those are usually higher.

The defeat of the bankruptcy plan highlighted a weakness that many people find with the bill — that it showers generous tax breaks on money-losing businesses like home builders but does little to help people facing foreclosure.