Foreclose vs. resetting mortgages: the fight goes on

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.

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.

The issue failed 45 to 51 in the Senate last week. Twelve Democrats voted with a united GOP caucus to defeat it. The Democrats who split with party leaders to oppose the Durbin amendment were Sens. Max Baucus of Montana, Michael Bennet of Colorado, Robert Byrd of West Virginia, Thomas Carper of Delaware, Byron Dorgan of North Dakota, Tim Johnson of South Dakota, Mary Landrieu of Louisiana, Blanche Lincoln of Arkansas, Ben Nelson of Nebraska, Mark Pryor of Arkansas, Arlen Specter of Pennsylvania (who flipped parties to join the Democratic caucus last week), and Jon Tester of Montana.

Critics, including some Senate Democratic leaders, said the vote proved that the financial services industry owns Congress.

“I hope people of this country will stand up and say to Congress, 'You’ve got the wrong friends,’ ” said Durbin, anticipating a negative outcome to his amendment last Thursday. "Your friends [should be] the families across this country who are struggling in this economy, and they need a lot of help."

In the 2008 campaign cycle, the finance, insurance, and real estate sector contributed $463.4 million to candidates for Congress, according to the Center for Responsive Politics in Washington. That’s more than contributions from the healthcare, energy, agriculture, transportation, and defense industries combined.

The finance, insurance, and real estate sector has been the No. 1 contributor to six of the 12 Democratic senators who voted against the bankruptcy reform provision, over their Senate careers, according to CRP data.

The Mortgage Bankers Association, which pulled out of negotiations over the Durbin amendment, credits Senate Democrats with agreeing to change the measure to reduce risks to banks.

"Since July 2007, the industry has helped avoid more than 3 million foreclosures through either loan modification or repayment plans,” says MBA spokesman John Mechem. “We are continuing to do more and more. Banks lose a significant amount of money when a home goes into foreclosure – upwards of $50,000 on each foreclosure. That’s a lot of motivation for banks, even if they have to modify the mortgage.

"If ‘cramdown’ were to pass," he says, "the number of people who would be helped would be dwarfed by the number of people over the long term who would be hurt.”

Senate Republicans were united against the mortgage reform provision. "There are already numbers of agreements under way to help people modify mortgages," says freshman Sen. Bob Corker (R) of Tennessee. "Should we throw to the courts the ability to change contract law that will penalize vast numbers of Americans because they build in such a risk premium for the future to solve it? No."