The Senate voted Thursday against holding a vote on a bill that included a proposal to allow bankruptcy judges to modify the mortgages of troubled borrowers to help them avoid foreclosure.

That aspect of the bill was strongly opposed by the lending industry, which maintained that it would undermine investor confidence in secondary markets where mortgages are bought and sold, resulting in higher interest rates and larger down-payment requirements for borrowers.

The Senate voted Thursday against holding a vote on a bill that included a proposal to allow bankruptcy judges to modify the mortgages of troubled borrowers to help them avoid foreclosure.

That aspect of the bill was strongly opposed by the lending industry, which maintained that it would undermine investor confidence in secondary markets where mortgages are bought and sold, resulting in higher interest rates and larger down-payment requirements for borrowers.

The White House issued a policy statement Tuesday threatening a veto of the bill, S 2636 — a warning reiterated by President Bush at a press conference Thursday.

Provisions of the bill would “do more to bail out lenders and speculators than to help American families keep their homes,” Bush said, and prolong the time it will take for housing markets to recover.

The Bush administration also opposes provisions of the bill that would provide $4 billion in state and local assistance for redeveloping abandoned and foreclosed homes, and triple funding for the Neighborhood Reinvestment Corp.

Thursday’s 48-46 vote was on a procedural matter, and the Senate could revisit the legislation again, particularly if it is amended. But it appears unlikely that Democrats who support the bill could muster the 67 votes needed to override a presidential veto of the bill in its current form.

In an alert to its members, the Mortgage Bankers Association called the vote a “major victory,” in which the group “used all tools available to influence today’s successful outcome” including activation of a grassroots network.

The MBA created a Web page devoted to arguments against bankruptcy “cramdowns,” but said it supported other provisions of the bill (see Inman News story). The Foreclosure Prevention Act of 2008 would also include $200 million for preforeclosure counseling, and authorize state housing finance authorities to issue $10 billion in mortgage revenue bonds to refinance subprime loans and provide mortgages for first-time home buyers.

The proposal to amend the bankruptcy code is supported by groups including the AARP, the AFL-CIO, ACORN and the Center for Responsible Lending, who claim voluntary initiatives by lenders to engage in workouts with troubled borrowers have helped on a small percentage of those who stand to lose their homes.

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