Senate nixes Democrats' housing crisis fix

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The Senate yesterday rejected a contentious Democratic proposal aimed at easing the housing crisis by giving bankruptcy judges the power to readjust the terms of troubled mortgages.

With that amendment to a broader housing bill off the table, lawmakers are struggling to come up with other provisions to help homeowners who are facing foreclosure.

Democratic and Republican senators reached a tentative agreement Wednesday on a basic proposal to help ease the slumping housing market. The measure includes $4 billion in grants for local governments to buy foreclosed homes and offers more than $100 million for foreclosure counseling programs. It also provides tax relief for some mortgage holders.

But while the legislation would provide money-losing businesses with $25 billion in tax relief in the next few years, it would offer just $3 billion to homeowners, according to estimates released yesterday by the Joint Tax Committee.

Democrats and other critics say more is needed to help homeowners facing foreclosure.

"With more than 20,000 homeowners losing their piece of the American dream every week, this issue isn't going away," said Wade Henderson, president of the Leadership Conference on Civil Rights. "To these struggling homeowners, the Senate housing package is a placebo."

The final measure, which the Senate isn't expected to vote on until at least next week, could be altered significantly, as both parties have offered amendments. Several Democrats say they plan to co-sponsor an amendment to double the proposed funding for mortgage counselors to $200 million.

Sen. Charles E. Schumer, New York Democrat, said counseling prevents foreclosures "96 percent of the time."

"It doesn't get much better than that," Mr. Schumer said. "This is a cost-effective tool that has the biggest bang for the buck in terms of responding to the housing crisis."

The proposal to give bankruptcy judges power to cut interest rates and principal on troubled mortgages died after senators voted 58-36 to table it. The proposal was a key sticking point in a failed Democratic effort in February to expand protections for homeowners facing foreclosure. Republicans said allowing bankruptcy judges to rewrite the terms of a mortgage would tighten credit and raise interest rates.

The measure seeks to reform and expand the Federal Housing Administration's (FHA) loan program, which typically carries lower interest rates. The bill includes a provision that would allow the FHA to insure loans up to $550,000 in the most costly real estate markets, up from the current limit of $362,000.

The bill also would provide a temporary $7,000 tax credit awarded over two years to people buying foreclosed homes in the year after the bill is enacted.

• This article is based in part on wire service reports.