Senate Stalls on Housing Bankruptcy Bill

Friday 13 March 2009

by: Kevin Drawbaugh and Corbett B. Daly | Visit article original @ Reuters

Mary Ann Herrera at her home in San Antonio. Legislation that could help homeowners is bogged down in the Senate. (Photo: Eric Gay / AP)

Washington - Legislation meant to help distressed U.S. homeowners by allowing bankruptcy courts to adjust the terms of mortgages on primary residences has stalled in the Senate, said congressional aides on Friday.

Democrats backing the bill - known as "cramdown" and opposed by most of the banking industry - have been unable to line up the 60 votes needed to clear the way procedurally for it to move ahead, the aides said.

"We're stuck in a place where we don't have 60 votes to pass the House bill as is," said an aide to a senior Democrat.

Last week, the House of Representatives approved a bill, by a 234-191 vote, that would allow bankruptcy judges to cut the mortgage debt of homeowners in bankruptcy court as a last resort to avert foreclosure.

Seen by Democratic supporters as vital to stabilizing the crumbling U.S. real estate market, the bill has been opposed by most bankers, despite last-minute amendments to limit its scope, including one restricting it to existing primary residence mortgages, not future loans.

James Lockhart, director of the Federal Housing Finance Agency, regulator of mortgage finance giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), said the bill needs work.

"We think it should be narrowed significantly," he told reporters after speaking at a conference on Friday. He said that as Congress considers the bill, "we are advising them to be extremely careful and narrow it as much as possible."

Under present law, bankruptcy courts may reduce many forms of debt for struggling borrowers - loans on boats, cars, vacation homes or family farms - but not primary residences.

Changing bankruptcy law to allow this, say bankers and Republican opponents of the bill, would raise costs for everyone by diverting capital from the mortgage debt market.

But Democrats backing the bill discount such fears and say it could sharply cut the high U.S. home foreclosure rate.

The House bill has additional provisions meant to help homeowners in the worst housing market in decades, a slump that has helped pull the U.S. economy into a deepening recession.

The bill is meant to dovetail with President Barack Obama's $75 billion foreclosure relief plan, launched as part of a $275 billion housing stimulus program announced last month.

In January, Citigroup (C.N: Quote, Profile, Research, Stock Buzz) said it would support a "cramdown" mortgage bankruptcy law reform to help troubled mortgage borrowers, but there has been no wave of support from other financial institutions in following weeks.

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Editing by Leslie Adler.