Moderate Democrats joined Republicans Thursday as the Senate rejected a proposal that would have allowed bankruptcy judges to change the loan terms of homeowners struggling to pay their mortgages.

Sen. Richard Durbin (D-IL), sponsor of the legislation, said that allowing judges to adjust interest rates, and even the amount of principal still owed on the loan, would head off future foreclosures, helping the housing market to recover.

But most of the financial industry opposed the bill, dubbing it a cram down measure, and lobbied hard for its defeat.

Durbin said that, while he is disappointed with the vote, he will continue to bring the issue to the floor until the Senate decides to put the interests of homeowners above the interests of bankers.

The American Bankers Association said it produced 12,450 letters from its members stating their strong opposition. In addition, the ABA said it was able to jam switchboards in senators offices and flood their inboxes with email. The measure failed on a 51-45 vote.

We have consistently maintained that allowing bankruptcy judges to arbitrarily rewrite the terms of a mortgage contract — including allowing them to reduce (cram down) the amount owed on a mortgage, change interest rates, or stretch out the terms of the loan would bring additional risk and uncertainty to an already volatile mortgage market and would make home loans more expensive and less available for consumers, said Floyd E. Stoner, the ABAs executive director, congressional relations & public policy.

Stoner said the Congress and the administration had already taken several strong steps to help troubled borrowers and get the economy back on track. Giving bankruptcy judges broad cram down authority, he said, would work against those efforts and effectively undermine the goal of stabilizing the housing market.

Durbin said that when he first proposed the legislation two years ago, nearly 2 million homeowners were at risk of losing their homes. Today, he says, that number has skyrocketed to over 8 million homes, with nearly one in six mortgages in America on the verge of foreclosure.

Weve given the bankers who got us into this crisis every opportunity to responsibly address this crisis and they have failed. Ill keep working to give homeowners every legal means to save their homes.