Senate legislators are set to vote this week on controversial legislation, S 896, which would allow bankruptcy judges to modify mortgage terms and possibly lower (or cram down) a portion of the principal balance. Senate leaders, however, face a shortage of support from the financial industry and within the Senate itself, even as talks continue. The bill’s principal sponsor, Sen. Richard Durbin (D-IL), continued discussions with large banks like Bank of America (BAC) and JP Morgan Chase (JPM) without any apparent compromise from either side, sources told American Banker. The bankruptcy modification section, as it stands, would require borrowers to fall two months behind in payments on an outstanding balance of less than $729,750 in order to qualify, Senate aides told the Washington Post. The bill would also require borrowers to split any profits from the sale of the home with the lender while in bankruptcy proceedings. “I hope we can muster the courage and find the votes, although I know it will be hard,” said Durbin on the Senate floor Monday, according to the Washington Post. “It’s hard to imagine that today the mortgage bankers would have clout in this chamber, but they do.” The so-called “cramdown” legislation must pass a Senate vote for those cases in which President Obama’s Making Home Affordable modification and refinance plans fail, according to head of the Congressional Oversight Panel on the TARP Elizabeth Warren. And the plans will likely have little effect on hard-hit markets where borrowers sit 30% to 50% underwater on the mortgage principle, Warren told Reuters. “[Cramdown] would be the one way to deal with principal that exceeds the value of the loan,” she said. “Without that, we risk a foreclosure mitigation plan that is helpful in the areas of modest need, but not helpful where the problems are acute.” Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.

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