Senator Durbin’s last minute efforts have fallen short. Despite offers to limit S.61 eligibility to homeowners already in foreclosure with home values below $729,000, the Senate voted 45-51 against a bill that would have allowed bankruptcy judges to modify first mortgages in chapter 13 bankruptcy proceedings. S.61 was proposed as a measure that would have helped stop the rising tide of foreclosures sweeping the country. Homeowners owing more than their homes are worth could have filed a chapter 13 bankruptcy to bring the mortgage in line with the value of their home. President Obama had been an outspoken supporter of such legislation and yet, barely made a peep as the bill died on the Senate floor amidst heavy fire from the banking lobby.
Critics argued that the bill would cause a sharp spike in interest rates on all residential mortgage transactions. Expanding the power of bankruptcy judges to modify secured debt would have necessitated stricter underwriting standards on the part of mortgage lenders, an already necessary step in light of the current subprime meltdown. The real issue was not rising interest rates, it was an unwillingness to further damage lender’s balance sheets. Widespread cramdowns of securitized mortgages would have turned toxic RMBS asset pools into Frakenstein like financial monsters that no private investor would ever agree to buy from the banks regardless of the discount (a solution Timothy Geithner won’t give up on).