First Foreclosure Bill Fails the Senate

The Associated Press

Published: April 4, 2008

WASHINGTON - Republicans and business-friendly Democrats on Thursday scuttled a plan to give people threatened with losing their homes more leverage in winning favorable loan terms from their lenders in bankruptcy courts.

The Senate killed the bankruptcy plan by a 58-36 vote on a bill designed to boost the slumping housing market.

The Democratic-backed bankruptcy law changes, opposed by banks, their GOP allies and a few Democrats, would have given judges power to cut interest rates and principal on troubled mortgages to help desperate borrowers trapped in subprime mortgages keep their homes.

The idea was to give borrowers duped into bad mortgages leverage in getting their loan terms adjusted. Such power, said the plan's chief proponent, Sen. Dick Durbin, D-Ill., would help "more people than all of the provisions combined" in the rest of the bill.

Republicans, 10 Democrats and Connecticut independent Joe Lieberman voted to scuttle the bankruptcy provision, however. Opponents said despite Durbin's modifications, the proposal would hurt more than help by leading mortgage lenders to ratchet up interest rates.

The defeat of the bankruptcy plan highlighted a weakness many find in the bill. It gives generous tax breaks to money-losing businesses such as home builders but little to help people facing foreclosure.

The bill is advertised as helping people keep their homes and injecting demand into a teetering housing market. Its most costly provision gives tax cuts worth $25 billion over the next few years to businesses like home builders and banks but only $3 billion in tax relief to homeowners, according to an estimate by the Joint Tax Committee, which explores effects of tax measures on the Treasury.

Benefits to businesses also dwarf $4 billion in the bill that would be given to cities and towns to buy and refurbish foreclosed and abandoned homes in an effort to stabilize communities and preserve neighboring home values.

Homeowners would benefit from $100 million to provide counseling to those facing foreclosure and help them to negotiate with lenders. The bill also would provide new authority for states to issue $10 billion worth of bonds to refinance subprime mortgages.

House Speaker Nancy Pelosi, D-Calif., promised improvements when the House takes up the measure and negotiates a final bill with the Senate.

The bill's tax provisions have sweeping support but give most benefits to businesses - regardless of whether they are in the housing market - that are losing money in the downturn. They would be able to deduct current losses against taxes paid up to four years ago, when times were profitable. The current limit is two years of operating loss "carrybacks."

Tax breaks, said Jerry Howard, chief executive at the National Association of Home Builders, would provide smaller home builders with an infusion of capital that would allow them to stay in business.

The four tax provisions would cost $28 billion through the end of 2010, but deliver only $1 billion this year.

"When they unveiled the package, the main theme was ... 'help families keep their homes,'" said Bob Greenstein, head of the liberal Center on Budget and Policy Priorities. "Three of the four provisions would do little or nothing to accomplish that goal."

The bill would provide a temporary $7,000 tax credit over two years to people buying foreclosed homes in the year after the bill is enacted. It would cost about $1.6 billion, which assumes about 240,000 home buyers would benefit.

It also has a rewrite of Federal Housing Administration law that would permanently raise the dollar limit on mortgages that FHA can insure to $550,000 in the most costly real estate markets.