April 30 (Bloomberg) -- Senate legislation letting bankruptcy judges cut mortgage terms to help borrowers was headed to defeat as a half dozen Democrats were opposed or undecided and major U.S. banks broke off talks on a compromise.

Senate Richard Durbin of Illinois, sponsor of so-called cram-down legislation, said today “months and months of heroic efforts” with banks and credit unions succeeded in winning one industry supporter: New York-based Citigroup Inc.

“I can’t tell you how many banks have walked away,” Durbin, the Senate’s second-ranking Democrat, said as debate began on the measure, which would amend a housing bill. The House passed its version 234-191 on March 5.

The Obama administration made the cram-down provision part of a plan targeting 9 million homeowners to help modify or refinance their mortgages. The industry has opposed a bankruptcy role in foreclosures since Durbin introduced it in 2007, and succeeded last year in killing the proposal from a housing bill.

Senator Thomas Carper, a Delaware Democrat, said in debate today he opposed the bill. Democrats Mary Landrieu of Louisiana, Ben Nelson of Nebraska and Jon Tester of Montana plan to oppose Durbin’s proposal, Huffington Post said this week. The measure needs 60 votes and Democrats hold 59 seats, after Republican Arlen Specter of Pennsylvania switched parties this week.

Democrats had negotiated with JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. on a compromise. Durbin said the lenders objected after months of talks, and “will not even participate in a negotiation,” although the banks are “surviving today because of taxpayers’ dollars.” The three banks Durbin identified received $95 billion in U.S. aid.

Loan Limits

Durbin’s latest draft proposes to limit the size of mortgages eligible for modification by judges, and covers loans issued through Jan. 1 or delinquent for 60 days. A provision in the draft also requires borrowers to contact loan servicers 45 days before filing for bankruptcy.

“It’s clear that part of the mortgage industry was never interested in meeting us halfway, as negotiations went forward, they moved the goal post back and back,” said Senator Charles Schumer, a New York Democrat.

Senate Republicans and the mortgage industry said the bankruptcy provision would prompt lenders to recover losses in court by raising interest rates on other borrowers. Durbin said on the Senate floor he was unable to sway groups including the American Bankers Association and Financial Services Roundtable.

Arizona Senator Jon Kyl, whose state ranked second in RealtyTrac’s first-quarter foreclosure report, said the measure would force mortgage companies to offset losses in court.

Kyl Opposition

“The result will be higher interest rates for home loans and fewer Americans will be able to afford to buy a house,” Kyl said. “The answer is not to incentivize bankruptcy by making it the means to save one’s home.”

A coalition of 12 industry groups, in a letter to senators yesterday, said the bill would destabilize the housing market and last week federal credit unions refused to back the bill.

“Opposition remains in both parties,” Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, said yesterday. “The bill has a tortured past and it is an uphill battle to get it passed.”

To contact the reporter on this story: Margaret Chadbourn in Washington at mchadbourn@bloomberg.net.

Last Updated: April 30, 2009 13:50 EDT