The Senate defeated the proposed mortgage cram down bill 51-45 on Thursday, falling 15 votes short for a bill that would have allowed judges to modify home loans through bankruptcy.
Specifically it would have allowed judges to either lower the interest rate and or reduce the principal on loans for primary residences.
Let me be the first to say that I was not crazy about the bill as it could add another element of risk for banks in the mortgage market. And not that I am worried about banks, but the result could have been increased borrowing costs for all consumers in order to offset this broader risk. For better or worse, we now may never know.
The unfortunate reality is that underwater or zombie homeowners, over 8 million in number, continue to present a systemic risk to the housing market, banking system, and broader economy. In the absence of a real housing stimulus, or a massive government bailout, these zombie homeowners will continue to be a headwind to a housing and economic recovery. Underwater mortgages are a pre-condition for default, especially during times of rising unemployment.
What is ironic about the failure of this legislation is that there is a double standard in Washington. The banks have been the recipient of massive government assistance, all in the name of "credit". From the TARP to the PPIP, to the incredibly favorable tax treatment they have received, the government has done everything and anything to make sure the banks will not fail.
But when it comes to the American people and homeowners, it becomes very clear who our representatives actually represent.