Senate Rejects Mortgage ‘Cramdowns’ by Judges

WASHINGTON — President Barack Obama lost his first big legislative fight Thursday when the Senate failed to pass a measure that would allow bankruptcy-court judges to reduce the value of some mortgages.

The defeat of the bill, which was a central part of Mr. Obama’s plan to help homeowners, came as the House voted 357-70 in favor of a measure that would cap the fees credit-card companies can charge. The credit-card measure now goes to the Senate, where it is likely to pass.

Small banks and credit unions had opposed letting judges reduce a mortgage to reflect a home’s market value — known as a “cramdown” — despite weeks of wooing by Democrats. Some opponents said they wanted to signal to Mr. Obama their dwindling tolerance for what they described as continued government intervention in private business, particularly businesses that didn’t precipitate the nation’s mortgage crisis. The measure failed a vote that would have moved it forward by 45-51.

Mr. Obama had described cramdown as a “stick” in the carrot-and-stick approach he sought to take with banks, as part of the administration’s effort to aid eight million homeowners whose properties are headed toward foreclosure. The measure would be in effect only until 2012, and could be used only after a homeowner had tried to rework the mortgage directly with the bank.

Sen. Dick Durbin (D., Ill.) had pushed for the cramdown measure. Along with many Republicans, a dozen moderate Democrats also voted against the bill. The House in March had passed the cramdown legislation by a vote of 234-191, along party lines.

Big banks, including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. were early supporters of a Senate compromise even as big-bank lobbying groups opposed it. Community bankers and two major credit-union groups also declined to support the measure, saying it would give too much power to judges.

“It’s hard enough to deal with bankruptcy judges, much less giving a bankruptcy judge the power to change the terms of a contract,” said Cam Fine, chief executive of the Independent Community Bankers Association, a group wooed by the administration. He said his group represents 8,000 community banks.

The House credit-card bill that passed Thursday would ban retroactive rate increases by credit-card issuers and rein in some interest-charging practices. For example, companies would have to give consumers 45 days’ notice before raising interest rates.

—Sudeep Reddy contributed to this article.

Write to Elizabeth Williamson at elizabeth.williamson@wsj.com

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