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Bankruptcy Cramdown Bill Hits Senate Today

Senate Majority Whip Richard J. Durbin (D-Illinois) has managed to get a vote scheduled today on his controversial plan to help homeowners avoid foreclosure, but the bill's chances of approval are slim, say congressional and industry sources.

The legislation, which has been stuck at the committee level for some time now, will be introduced as an amendment to another piece of legislation, known as the “Helping Families Save Their Homes Act of 2009," which the Senate is also expected to vote on.

Four hours of debate have been scheduled to be followed by a vote at about 2:30 p.m. ET vote, according to congressional staffers.

The cramdown proposal is one of two legislative flashpoints between the Obama Administration and the business community. The second, a move toward greater credit card regulation, has more support and is likely to move forward. (Read an analysis of the political ramifications of both proposals here).

Industry opposition to the cramdown proposal, which essentially lets financially-strapped homeowners file for bankruptcy protection to restructure their debt and avoid home foreclosure, has been strong.

Industry groups Wednesday sent a joint letter of opposition to Senate members, saying the measure would hurt an already unstable housing market by allowing bankruptcy judges to rewrite mortgage contracts. The House passed what some consider a watered-down version of cramdown legislation earlier this year.

Consumer groups and the White House support the cramdown idea, as a key component in the effort to forestall home foreclosures.

Sen. Durbin has been pushing the cramdown measure for more than two years, but there have been persistent concerns that it could not attract the 60 Senate votes necessary to avoid a GOP filibuster.

If the Durbin amendment fails to get 60 votes Thursday, as is expected, it will be withdrawn altogether and no further cramdown amendments will be allowed, according to terms agreed in advance, said one source.

Supporters of the plan were emboldened earlier this year when Citigroup broke ranks with the rest of the industry and said it would support the bankruptcy court alternative.

Proponents say the threat of a bankruptcy court filing—Chapter 15 for individuals—would encourage lenders to make a more concerted effort in working with borrowers trying to avoid foreclosure.

Opponents say it underlines contract law and will raise the cost of borrowing as lenders factor in the possibility of bankruptcy proceedings.

Opposition aside, major industry players such as Bank of America and JPMorgan Chase and have been negotiating terms and specific language for a narrow version of the measure for about a month. Those talks are said to have failed to reach any agreement.

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