In May of this year, Congress got it wrong.  This time it was the Senate. 

In a stunning 59-41 vote,  the Senate rejected the Durbin Amendment to the Helping Families Save Their Homes Act which would have sent much needed relief to American homeowners.

While Congress and the president are doling out billions of dollars to bail out, among others,  the banks, and the insurance and automotive industries, American consumers have taken the shaft.  And this legislation, which promised incredible amounts of relief to homeowners, would not have cost taxpayers a penny.

The legislation had significant bipartisan appeal.  It had the ingredients of a populist victory.  Only the Senate could grab defeat from the jaws of victory.  One of the most powerful lobby groups in America–the American Bankers Association–opposed the legislation which is what sounded its death knell.

By the Durbin amendment, 1.7 million mortgages would have been prevented from being foreclosed.  Over $300 billion in home equity for neighboring homeowners, who have made each of their own mortgage payments on time, would have been preserved.  The Durbin Amendment would have created the necessary lender incentives so that consumers could have modified home mortgage loans either outide or within the bankruptcy court.

The objective of the amendment was to encourage mortgage servicers to offer aggressive loan modification to homeowners unable to  pay their mortgage loans.  Compared to the foreclosure alternative, these modifications would be more profitable for the banks, more secure for the families, and more stable for the surrounding neighborhoods.  Borrowers at risk would have received assistance from the bankruptcy courts to restructure loans, but only if the servicer had not first offered to modify the loan outside of court.

If a mortgage servicer provided either a modification offer that reduced the family’s monthly payment to 31 percent or less of their income, or a refinancing offer at conventional rates, the offer would have precluded a borrower from trying to rewrite the terms of his mortgage loan in Chapter 13 of the Bankruptcy Code.  In addition, only first mortgages originated before 2009, with outstanding principal less than $729,750, that are at least 60 days delinquent, and for which a foreclosure notice has been sent, would have qualified for modification under Chapter 13.

For those borrowers who did not receive a modification offer from their servicer, the bankruptcy court would have been able to reduce the loan principal to the fair market value of the home, reduce the interest rate to a conventional rate plus a reasonable premium for risk (which currently would be approximately 5.5 percent), and lengthen the term of the loan.

Furthermore, the debtor would have been required to evenly split any price appreciation with the lender to the original principal amount if the home was sold during the term of the Chapter 13 plan.  After all, if we expect the banks to share the downside with the consumer, it’s only fair that that they share in the upside as well.

So, why is a post mortem so important?  We need to know what’s happening on Capitol Hill.  This time the Senate failed.  The next time these issues are raised, we need consumer lobyists, as well as lobbyists for the National Association of Consumer Bankruptcy Attorneys, to swing into action and persuade our reps in the senate to vote for this common-sense proposal.