House Centrists Prevail on Altering Mortgages in Bankruptcy

By: GREG HITT | Wall Street Journal

WASHINGTON -- The House approved "cram down" legislation that would allow troubled homeowners to ask bankruptcy judges for relief from mortgage debts -- but only after Democratic centrists won concessions making the bill more lender-friendly.

President Barack Obama has endorsed giving judges new authority to modify mortgages as a key response to the wave of foreclosures sweeping through the economy. Supporters of the move say the proposal to give courts cram-down authority could spur mortgage servicers to move aggressively to help borrowers, in order to avoid having modified loans forced on them by a judge.

Much of the financial-services industry opposes the proposal, saying it would create uncertainty in an already troubled market and force them to raise the cost of lending. Nodding to those business arguments, a coalition of moderate Democrats blocked an earlier version of the bill. The moderates argued that greater efforts were needed to ensure that homeowners make good-faith attempts to work with their lenders, before going into bankruptcy.

The revised legislation, approved Thursday on a 234-191 vote, included a package of provisions intended to accomplish that goal.

The effort on the cram-down bill came as some centrist Democrats in Congress have started to flex their muscles against the party's more liberal leadership on a number of issues. Also this week, some Senate Democrats have said they would break with the party and oppose a $410 billion omnibus spending bill they say is too bloated with spending on special projects for members, and they are urging Mr. Obama to veto the package.

Democratic leaders had expected to overcome those objections by attracting some Republicans votes. But late Thursday, Democratic leaders conceded they lacked the 60 votes needed to cut off debate, forcing action on the measure to be carried over to next week. The maneuvering likely won't derail the spending bill. But the omnibus was among the least controversial measures on the agenda, and the unexpected delay dramatized the difficulties ahead for Democratic allies of President Obama as they push deeper into the year and take on truly difficult issues, such as health care and climate change.

The spending measure is needed to finance the government through Sept. 30, the end of the fiscal year, and is expected to pass the Senate with some Republican support.

The break among Democrats on the 2009 budget highlights the fault lines emerging within the majority, as moderates grow more assertive and influential in Congress.

Democratic centrists already played a pivotal role in shaping the $787 billion stimulus package, leading efforts to pare the size of the measure, while winning commitments from the White House to embrace long-term goals to contain the budget deficit. Now, they are pulling out the knives as the House and Senate get ready for debate on Mr. Obama's $3.6 trillion budget plan.

"There are a lot of concerns about the size of the budget," warned Nebraska Sen. Ben Nelson, one of more than a dozen centrist Democrats, many of them freshmen, who have decided to "band together" to press the cause of fiscal responsibility.

For years, moderates in both parties have existed in a sort of political netherworld, courted in the rare cases when their votes were absolutely needed but shunned much of the rest of the time by more orthodox colleagues less willing to seek compromises in the political center.

Mr. Obama and his allies in the Democratic congressional leadership are confronting a phenomenon not glimpsed often in recent years: moderate Democrats with influence. That's because Democratic ranks have grown in large part because of recent successes in regions such as the South, the Mountain West and the Industrial Midwest, where Democrats haven't done well in recent decades. In the current Congress, 83 Democrats represent House districts won by former President George W. Bush in 2004.

"Because of our numbers, they figure they need to work with us," said Rep. Charlie Melancon (D., La.), a leader of the 51-member Blue Dog group, which advocates for tighter limits on spending and for vigorous efforts to contain the deficit. During debate on the stimulus, Blue Dogs won a commitment from Mr. Obama to endorse enactment of rules requiring that new government programs be paid for with spending cuts or tax increases, rather than financed by new borrowing.

"There are people on the far right and left who don't like what we're doing; they look at us as the blockade," Mr. Melancon said. "We look at ourselves as the balancing act between the extremes."

Behind the scenes, some Blue Dogs worked with another moderate bloc, the New Democrats, to win changes in the bankruptcy legislation. New Democrats tend to be business-friendly and tech-savvy, said Rep. Ellen Tauscher (D., Calif.), who leads the 67-member group.

At a closed-door meeting of House Democrats last week, Rep. Tauscher voiced strong concerns about the legislation, warning that the initial House bill didn't go far enough to ensure homeowners try to work with banks.

With the caucus divided, the House Democratic leadership put the brakes on the bill, rather than risk possible defeat on the floor. That set in motion negotiations, which eventually resulted in stronger requirements that homeowners make systematic -- and verifiable -- attempts to modify loans before resorting to bankruptcy.