Senate Rejects Bankruptcy Bailout for Troubled Homeowners

ABC's Z. Byron Wolf reports from Capitol Hill: On the same day that the White House announced that overextended Chrysler would go into a "quick" bankruptcy -- its loans rewritten by a judge to emerge for life another day -- Senators defeated a proposal to allow bankruptcy judges to rewrite home loans.

The vote on a so-called "cramdown" proposal, which President Obama supported during the presidential campaign, was 45-51 despite support from the president and the endorsement of one large bank, Citigroup. Read more on Citigroup's endorsement of the plan HERE. The mortgage restructuring proposal needed 60 votes to pass so it didn't even come close to passing. Several Democrats, including the newest Democrat, Sen. Arlen Specter of PA, opposed cramdown.

Senators will vote on a bill to upgrade voluntary programs that entice banks to restructure loans, but do not force them, sometime next week.

Perhaps the Chrysler analogy is a bit of a stretch, but on the Senate floor, Sen. Dick Durbin, D-Ill., the author of the proposal, was distraught, his voice dripping with sarcasm as he described failed negotiations he had with banks and banking associations.

Durbin said on the Senate floor that in negotiations, the banking industry argued that restructuring primary home loans -- secondary home loans and luxury loans for items like yachts can already be restructured by a bankruptcy judge -- would create a moral hazard in this country.

"Senator, you don't understand the moral hazard here," Durbin paraphrased the banking argument. "People have to be held responsible for their wrongdoing. If you make a mistake, darn it, you've got to pay the price. that's what America is all about."

"Really, Mr. Banker on wall street? that's what America is all about?" he railed.

"What price did wall street pay for their miserable decisions, creating rotten portfolios, destroying the credit of America and its businesses?" Durbin said of the $700 billion Wall Street bailout Congress passed, and Durbin supported in the waning days of the Bush administration. "Oh, (the bankers) paid a pretty heavy price. Hundreds of billions of dollars in taxpayers' money sent to them to bail them out and put them back in business, even to fund executive bonuses for those guilty of mismanagement. Moral hazard, huh? How can they argue that with a straight face? They do."

Durbin's proposal was scaled back from a version of bankruptcy relief for homeowners that passed the House of Representatives. He would have restricted the ability of judges to rewrite the loans of only people who got subprime loans and only those already behind in their payments who had not been offered a restructuring by the government or their bank.

But only one bank, Citigroup, endorsed the plan. Negotiations with other banks stalled and earlier this week, the American Bankers Association and other trade groups united against Durbin's proposal.

"Congress and the administration have taken several strong steps to help troubled borrowers and to get our economy back on track. Enacting this change to our current bankruptcy law would work against those efforts and have the unintended consequence of further destabilizing the markets," argued the trade groups in a letter to lawmakers this week. "Though interest rates today are at all time lows, this legislation would result in higher costs for future borrowers."

Congress will rehash a version of this debate again next week when Senators consider legislation to reform the credit card industry.

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