Lane will revert back to the Seahawks, who had agreed Monday to send him to Houston along with a 2018 fifth-round pick and a 2019 second-round pick for left tackle Duane Brown.
In the new deal, Seattle will give up a higher draft pick to account for Lane's not being included in the deal. According to the source, Seattle will get Brown and Houston's 2018 fifth-round pick in exchange for the Seahawks' 2018 third-rounder and their 2019 second-round pick.
It's not clear what caused Lane to fail his physical. He began Sunday's game against Houston as Seattle's nickelback but was replaced by Justin Coleman after playing six snaps. Asked Monday about that move, coach Pete Carroll said Lane suffered a thigh bruise.
Lane had returned for Sunday's game after missing two games and most of a third with a groin injury. He was listed as questionable heading into the Houston game because of that groin injury and also because of a more recent finger injury.
With Lane reverting back to Seattle and the team adding Brown, the Seahawks are one over the 53-man roster limit and might have to do more salary-cap maneuvering. The Seahawks on Tuesday reworked quarterback Russell Wilson's contract to free up $4.17 million in cap space, a source confirmed to ESPN. That gave Seattle enough room to absorb Brown's contract, which included a little less than $5 million for the remainder of 2017. But that was with the remainder of Lane's salary -- a little over $2 million -- coming off Seattle's books.
Lane's salary is guaranteed for 2017, which means the Seahawks wouldn't free up any cap space by releasing him. The Seahawks might also decide to keep him to help with depth at cornerback, something they were going to need after trading Lane.