(Adds Durbin, Hay comments, background)
By Kevin Drawbaugh
WASHINGTON, April 3 (Reuters) - The U.S. Senate on Thursday rejected a Democratic proposal that would have rewritten bankruptcy law to help struggling mortgage borrowers, while moving ahead with debate on a housing market rescue bill that includes a $6 billion tax break for home builders.
In a 58-36 vote, the Senate defeated an amendment offered by Assistant Senate Democratic Sen. Richard Durbin to empower bankruptcy judges to ease mortgage payment terms for distressed borrowers under strictly limited circumstances.
The Durbin amendment -- which would have affected only mortgages already in place upon enactment -- was opposed by the influential banking industry and Republicans, who were joined by 11 Democrats in voting to kill it.
Banking lobbyists and Republicans said the Durbin amendment would intrude on contracts and drive up interest rates.
“The provision I offered was narrowly tailored and provided real help to more than half a million American homeowners facing foreclosure,” Durbin of Illinois said after the vote.
“Unfortunately, my amendment was strenuously opposed by the banking lobby and their powerful friends in the Bush Administration and in the Senate,” he said.
The Senate then resumed debate on a broad housing bill it hammered out earlier this week as a scaled-back compromise drawn up by Democratic and Republican leaders.
On a separate track, the Durbin measure was approved as a bill by the Senate Judiciary Committee. That means it could return to the full Senate, but again face stiff opposition.
“I‘m disappointed in today’s outcome, but this is not the last word on the housing issue,” Durbin said.
With the economy teetering near recession, lawmakers are under growing pressure to address rising foreclosures, falling home prices and credit market paralysis.
Demands for action on behalf of average homeowners have grown since the Federal Reserve last month engineered a massive bailout of investment bank Bear Stearns BSC.N.
The Senate bill, with lengthy debate still ahead of it, is estimated to cost $15 billion to $20 billion.
The bill’s tax break for home builders and other businesses involves extending a rule that allows businesses to count net operating losses against tax returns from prior profitable years. The rule, in place for 2008 and 2009 only, would allow carry-backs of four years instead of the current two years.
“This is a taxpayer-funded give-away for corporations that caused the housing and mortgage crisis. It doesn’t do enough to help struggling homeowners,” said Jacob Hay, spokesman for the Laborers International Union of North America.
Many members of the union work in home construction and thousands have lost their jobs in recent months.
The National Association of Home Builders’ political action committee in mid-February halted donations to U.S. congressional campaigns, citing concerns of inadequate government action on housing market problems.
The Senate bill now under consideration would also give the Federal Housing Administration (FHA), an agency that insures mortgages, a bigger role in the troubled mortgage market by raising the size of mortgages it can stand behind.
Under the bill, the FHA loan limit would rise to $550,000 and require a 3-1/2 percent downpayment from borrowers.
The Senate bill would also offer a $7,000 tax credit, spread over two years, to buyers of homes in or near foreclosure and permit issuance of $10 billion more in tax-free revenue bonds to help troubled borrowers refinance their mortgages.
All U.S. home owners who pay property taxes would get a standard deduction of $500 for single filers and $1,000 for joint filers under the bill. At present, only taxpayers who itemize may deduct state and local property taxes.
In addition, the bill would direct $4 billion in federal grant money to communities to buy and fix up foreclosed homes, while devoting $100 million in federal money to debt counseling and requiring more plain-English mortgage paperwork. (Additional reporting by Thomas Ferraro, Richard Cowan and Diane Bartz; Editing by Leslie Adler, Gary Hill)