Following a veto threat by President Bush, the U.S. Senate has backed off legislation that would enable bankruptcy judges to modify mortgages.
The Senate voted today to prevent further debate on S. 2636, The Foreclosure Prevention Act of 2008, according to an announcement today from the Mortgage Bankers Association.
The bill, introduced by U.S. Senate by Sen. Harry Reid (D-Nev.) earlier this month, sought to change the bankruptcy code so that Chapter 13 bankruptcy judges could modify mortgages on a borrower's primary residence. Reid said such a change would reportedly help 600,000 borrowers avoid foreclosure.
MBA has said the approval of the legislation would raise overall mortgage rates by 1.5 percent to 2 percent.
"Bankruptcy is not the answer for borrowers who are having a difficult time making their mortgage payments and it is gratifying to see enough Senators recognize this fact," MBA Chairman-elect David G. Kittle said in the statement. "While there were some provisions of the bill that we would like to see enacted into law, like additional resources for housing counselors and increased help for borrowers trying to refinance out of troubled loans, the overwhelming negative effect of the bankruptcy provision outweighed those positive measures."
Bush said such a law would likely prolong the amount of time before a market recovery.
"The administration strongly opposes providing bankruptcy judges with power to modify the terms of mortgages for debtors in bankruptcy proceedings," the White House stated in an administrative policy statement Tuesday.
Reid sent a letter to the president expressing his disappoint in the administration's position, and acknowledged his position on the bankruptcy provision.
"We have made significant modifications in the version we plan to offer in the Senate later this week that narrow its scope," the letter stated. "The revised Title IV would allow judges to modify only subprime and adjustable-rate mortgages that already have been originated and provides creditors the ability to recoup lost mortgage principal after a modification, if and when the debtor resells."
Reid explained that the modified provision would still prevent 200,000 foreclosures.
Among Republican's to help block the bill was Sen. Lamar Alexander (R-Tenn.), who said a plan by the GOP in which $10 billion would be provided to refinance troubled mortgages is a far better alternative. He noted the Democrat's bill would lead to higher mortgage rates.
"The plan being offered by Senate Democrats would turn mortgages into junk bonds and undermine property values," Reid said in an announcement.
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