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Obama mortgage plan has been tried, defeated

Arkansas senators voted no.

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NO BAILOUT: When it comes to helping homeowners, Senators Pryor and Lincoln said no.
  • NO BAILOUT: When it comes to helping homeowners, Senators Pryor and Lincoln said no.

As part of a plan to help financially troubled Americans, Barack Obama last week proposed legislation that would allow judges to adjust the mortgage terms of homeowners who are in bankruptcy, so they'd have a better chance of saving their homes from foreclosure.

But such legislation was considered by the Senate in April, and defeated. Both Arkansas senators voted against it. Both say there's a good chance they'd do so again, even if the bill had Obama's backing, and even though they're both Democrats and supporting Obama for president.

“It depends on how the bill is written,” Sen. Blanche Lincoln said. “We need stability in the market. How do we stabilize the market place if lenders know that a judge can change the terms of a mortgage?” She's open-minded, she said, but she still has serious concerns about the legislation. Any help the bill might give homeowners in the short run could be offset by higher costs to borrowers across the board in the future, she said, because the added risk could be passed on to them. 

Michael Teague, a spokesman for Sen. Mark Pryor said: “We haven't seen his [Obama's] actual proposal, so it's hard to say at this time yes or no. Of course, the devil is in the details. The senator is not opposed to judicial discretion with regards to bankruptcy judges, with the right parameters in place.” He too expressed fear that the proposed legislation could drive up interest rates for future borrowers, adversely affecting an already slumping housing market.

Critics of the existing bankruptcy laws complain that the laws allow the wealthy to alter loan terms on vacation homes and investment properties, while a less-affluent borrower can't alter loan terms on his or her primary mortgage.

Teague said that most commercial banks' loan portfolios consist mainly of mortgages on primary residences. If any borrower at any time could petition a court for a readjustment of his mortgage terms, “banks would not be able to adequately determine the credit risk of their portfolio,” he said.

As for allowing adjustment for mortgages on secondary residences, Teague said “I can't speak as to why this was originally allowed – it has been in the law since the ‘70s. I can say that secondary mortgages on vacation and/or rental property, etc., make up a much smaller amount of a bank's mortgage portfolio.”

The legislation that was defeated in April was sponsored by Obama's fellow Democratic senator from Illinois, Richard J. Durbin. It was offered as an amendment to a housing bill that was intended to address the growing number of foreclosures and to stabilize the housing market. Teague said the amendment was a “poison pill” – Republicans were committed to block passage of the larger bill if it contained the Durbin amendment. Durbin eventually agreed to let the amendment be tabled, and the housing bill was approved.

The issue has emerged again this week in discussions of the federal bailout of financial institutions. Senate Democrats Monday proposed to amend a Bush administration proposal to include a measure to give bankruptcy judges the ability to alter the terms of primary mortgages to help homeowners facing foreclosure.    

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