NEW YORK (CNNMoney.com) — The Obama administration lost a bid to add a powerful weapon in its fight against foreclosure Thursday, after the Senate voted down a proposal to allow bankruptcy judges to modify mortgages.

The defeat left many housing advocates questioning the effectiveness of the president’s loan modification plan. The so-called cramdown provision, which would have allowed judges to reduce mortgage principal, would have put pressure on servicers to modify loans before borrowers file for bankruptcy.

The financial industry lobbied hard against the bill, arguing that allowing judges to change mortgage contracts would add instability into the market and raise interest rates. Senate Republicans and some moderate Democrats were concerned about the bill’s impact and about the growing resentment of homeowners in good standing.

The bill was defeated by a 51-45 vote. The House had passed similar legislation last month.

The vote comes on the day that a new report showed foreclosure starts spiking to a record high in March. Servicers initiated foreclosure proceedings against 290,000 borrowers, according to Hope Now, a coalition of lenders, servicers, investors and housing counselors. That’s the highest monthly total since the group began tracking data in mid-2007.

posted by : Joe Sloboda