Disagreement among Senate Democrats over how many struggling homeowners should qualify for court-ordered mortgage relief has stalled a key part of President Obama‘s foreclosure prevention plan on Capitol Hill.
Behind the scenes, top Democrats are offering banks and credit unions sweeteners to drop their opposition to the plan, hoping that even tepid support from lenders might win a few vital votes from skeptical Democrats and Republicans. The bill would give judges new power to lower the interest rate and principal on a primary home loan as part of a bankruptcy settlement.
The measure passed the House last week – but only after a small revolt by moderates forced Democrats to narrow who might qualify.
They made sure the help was restricted to people who couldn’t afford their mortgages without a court-ordered rewrite to lower their monthly payments, and those who had already tried to work out more affordable terms with their mortgage company.
The House bill also lets bankruptcy judges consider whether a homeowner has already been offered a deal by the lender that matched the guidelines Mr. Obama recently laid out in his housing rescue plan – one with monthly payments amounting to no more than 31 percent of the owner’s income.
Lenders cheered the changes as an improvement but were still opposed to the final bill. They have long argued that the measure would impose steep and unpredictable costs that would be passed on to homeowners as higher interest rates. A multimillion-dollar industry lobbying effort helped kill the measure last year.
Seeking to avoid a similar fate this time, Sen. Richard J. Durbin, Illinois Democrat, is drafting an even narrower alternative.
One option essentially would prohibit anyone who could get a reasonable deal with the lender from seeking mortgage relief in bankruptcy, according to top Democratic aides and lobbyists familiar with the discussions. They spoke on the condition of anonymity because they were not authorized to disclose the negotiations.
Sen. Evan Bayh, Indiana Democrat, is working on a rival plan that would allow still fewer homeowners to qualify for home loan rewrites imposed by a bankruptcy judge. Mr. Bayh and Republican Sen. Arlen Specter of Pennsylvania are discussing a measure that would be limited to subprime mortgages.
Mr. Bayh said the House bill would ultimately increase the cost of lending. “We have to work to strike a better balance and take into account some of the long-term concerns about driving up the costs of mortgages,” he said.
Mr. Durbin, Sen. Charles E. Schumer of New York and other senior Democrats are shopping for a deal with industry figures that could win the support of key centrists in their party, plus a few Republicans.
Mr. Schumer has floated the idea of attaching a legislative gift that credit unions have long coveted – killing a decade-old limit on the amount they can lend to businesses – in exchange for their support, according to people close to the talks.
Currently, just 12.25 percent of a credit union’s lending can go to businesses. Efforts to lift the cap have run into fatal opposition from the banking industry, which doesn’t want the added competition.
Backing from credit unions could bring critical votes to the bankruptcy measure, because they are spread throughout the country and can activate a powerful grass-roots network on Capitol Hill.
So far, however, credit unions aren’t biting.
Democrats had hoped to move the measure through the Senate this week, but short of the 60 votes that would be needed to advance it past procedural hurdles, they held off. Majority Leader Harry Reid, Nevada Democrat, recited a March to-do list Thursday that omitted the housing measure.
The delay has emboldened critics to redouble their efforts to kill the bill – or at least try to exact a steep price for supporting it.
Sen. Bob Corker, Tennessee Republican, said the measure is losing steam as moderate Democrats express concerns and Mr. Obama fleshes out his broader homeowner rescue plan with many other options for working out burdensome mortgages. “The momentum has swung against it now,” he said.