The Senate will also take up legislation to allow bankruptcy judges to modify the terms of primary mortgages, which is currently prohibited. The legislation, if it has any chance of passage in the Senate, will be watered down even more than the House version, which extended bankruptcy protection only to mortgages originated before passage of the law and imposed rather onerous duties on homeowners claiming eligibility. The final version will likely apply only to subprime mortgages originated before the bill’s (unlikely) passage. While bankruptcy modification would be an important incentive for mortgage holders to figure out a way to modify primary mortgages to avoid both foreclosure and bankruptcy, big banks are generally opposed, claiming that interest rates would increase as a result (which empirical research in fact refutes). Votes on this bill will expose legislators who remain unwilling to aid homeowners, whom Congress has yet to assist in any meaningful way (President Obama has committed $75 billion of TARP funds to homeowner assistance, while asking Congress to pass the mortgage cramdown provision.)

Finally, the Senate today begins debate on a bill to strengthen laws against mortgage fraud. While supporters in the Senate will champion the bill’s expansion of protections against mortgage fraud and expanded resources for investigations of fraud, the bill is a tepid step towards a larger overhaul of mortgage industry regulation. Significantly, the bill applies fraud statutes to non-bank financial institutions, which make about half of all subprime mortgage originations but were not previously covered by the statutes. However, this bill is no substitute for broader legislation to abolish some of the abusive practices that fueled the housing crisis, like requiring calculation of ability to repay before a mortgage is originated and banning compensation of mortgage brokers based on the terms of mortgage loans, a practice that leads to higher interest rates for borrowers. Hopefully, passage of the anti-fraud statute will not suck any air out of the significant momentum toward regulatory reform.

In the next few weeks, legislators’ willingness to apply the lessons of the financial crisis will be exposed as they weigh how much influence to allow the financial services and mortgage industries against the still endangered interests of the American consumer.