The centerpiece of President Obama’s plan to keep thousands of people from losing their homes amid the worst economic crisis in decades appears headed for defeat next week in the Senate.
A handful of Democrats are siding with Republicans in opposition to allowing people to seek mortgage relief in bankruptcy court. Critics say the change would unleash a torrent of loan defaults, ultimately driving up mortgage rates and introducing fresh uncertainty into an already ailing economy.
The rejection would deal a direct blow to a popular president as he pushes an ambitious agenda to stabilize the economy.
The number of homes under threat of foreclosure by banks has shot up since last year, when 2.3 million U.S. households received foreclosure filings.
RealtyTrac Inc., a foreclosure-listing firm, recently reported that some 650,000 homes received at least one foreclosure-related note in the first three months of 2008. This year, nearly 804,000 homes have already received foreclosure notes.
Economists also estimate that about a fourth of U.S. mortgage-holders owe more to the bank than their property is worth.
In February, Mr. Obama announced a plan to save some 9 million debt-ridden individuals from losing their homes by providing incentives to lenders to cut homeowners’ monthly payments or refinance existing troubled loans.
As part of the plan, Mr. Obama said he also wanted to change bankruptcy laws so a judge could reduce a person’s mortgage payment based on its market value. The option was cast as a last resort for homeowners unable to modify their loans any other way.
Congressional Democrats championed the legislation, which passed the House in March. But the measure quickly stalled in the Senate amid a multimillion-dollar lobbying effort by banks and credit unions that said the forced easing, or “cramdown,” would impose steep and unpredictable costs.
Sen. Richard J. Durbin, Illinois Democrat, has led negotiations with the banking industry on a compromise that would shore up Democratic support and win over a few moderate Republicans to reach the 60 votes needed to defeat a filibuster and pass the bill.
But this week, the National Association of Federal Credit Unions rejected the proposal. While other groups, including banking giants JP Morgan Chase, Bank of America and Wells Fargo, remained at the table, Democratic aides said the prospects of an agreement looked dim.
Believing the Senate needed to move on, Senate Majority Leader Harry Reid, Nevada Democrat, has tentatively scheduled an April 30 vote.
“There’s no reason why every Republican shouldn’t be on record for opposing a provision that could help tens of thousands of Americans,” said Reid spokesman Jim Manley.
Among those expected to oppose the proposal next week are moderate Democratic Sens. Jon Tester of Montana and Ben Nelson of Nebraska.