WASHINGTON (Reuters) - The U.S. Senate on Thursday rejected an amendment that would have given bankruptcy judges the power to ease a homeowner's monthly payments and prevent foreclosure.
Supporters of what was known as the 'cramdown' provision argued that it would serve as a useful tool to help repair the housing market and keep millions of troubled borrowers in their homes.
Opponents of the plan have said its arbitrary rules would scare investors away from the housing market and prolong the current slump.
Twelve Democrats joined all Senate Republicans in voting against the measure, which failed on a vote of 45 to 51. That was well short of the 60 votes needed to get it past Senate procedural roadblocks.
"There will come a time when this bankruptcy will pass," Senate Majority Leader Harry Reid told reporters before the vote, vowing that the measure would be reconsidered in time.
While bankruptcy courts may rewrite the terms of most consumer debt, they may not ease the terms of many home mortgages.
Senator Richard Durbin, an Illinois Democrat, has for weeks tried to reach a compromise with leading banks like Bank of America, JPMorgan Chase and Wells Fargo & Co, but those talks collapsed in recent days, said sources close to the discussions.
"There's been resistance. By whom? The banks. The banks who brought us this crisis in America have resisted this change to do something about mortgage foreclosure," the Democratic whip said on the Senate floor as he introduced his bill.
Durbin and other Democratic leaders in the Senate said they would continue to push for mortgage "cramdown," which President Barack Obama has said is an important part of his administration's effort to stem foreclosures.
Opposition to the plan was largely led by Republicans, who warned it would upset bankers' long-held expectations that they may reclaim property from delinquent homeowners.
"If all else fails, the lender always has the right to take back the house for which he lent the money," Senator Jon Kyl said of the conventions that have long governed the mortgage lending industry.
"If we eliminate this security for lenders ... then lenders will have to charge higher rates," the Arizona Republican said.
Trade groups representing all quarters of the financial services industry pressed lawmakers to reject the measure and their warnings about the harmful impact of "cramdown" seem to have swayed many Democrats. Two more Democrats voted against the measure on Thursday than when the issue was first defeated in the Senate twelve months ago.
"Twelve Democrats against -- that's big. There's a lot of second-guessing about why this happened and how Durbin handled it," said Charles Gabriel, managing director at Washington-based consultant with Capital Alpha Partners, LLC.
Consumer advocates, though, said they were stunned that lenders continue to attack the "cramdown" measure while they accept government help to stabilize the financial system.
"The banking industry, after receiving hundreds of billions of dollars in federal assistance, spent millions of dollars in its campaign against this measure," the Center for Responsible Lending said in a statement.
But in the House of Representatives, the lending industry suffered a blow on Thursday with passage of the Credit Cardholders' Bill of Rights that shields consumers from many fees and costs.
That bill passed on a vote of 357 to 70 with 107 Republicans voting in favor.
The changes to the bankruptcy rules were offered as an amendment to a broader bill that would increase the federal government's support for the Federal Deposit Insurance Corporation and trim the red tape for another foreclosure-prevention program. These two measures have broad support in the Senate. Lawmakers will continue debate next week.
By Patrick Rucker and Donna Smith with Al Yoon in New York; Editing by Jan Paschal