The United States Senate rejected a measure to give bankruptcy court judges the ability to cram down loan balances and interest rates on primary residences. Had it passed, it would have given many homeowners the ability to stay in their homes rather than face the loss of their homes to foreclosure.

While proponents of the bill vow to bring the issue once again before Congress, the big three American banks (Bank of America, J.P. Morgan Chase, and Wells Fargo) continue to be formidable obstacles blocking the way to bankruptcy reform.

first tuesday take: Once again, the obstinacy of the financial services industry continues to delay the market recovery with the delusions that homeowners will keep making their housing payments when their loan-to-value mortgage situation produces a negative equity and no justification to keep the property. No lender will now process a cramdown knowing two things: Congress will not allow judges to involuntarily reduce the economic damage negative equities place on homeowners, and, lenders by refusing to voluntarily cramdown loans and shouting about morals and credit ratings will force many homeowners to continue to pay where a rational homeowner with a negative equity would throw in the towel. All this lender conduct will only lengthen the time for recovery and, in the end, add to the growing real estate owned (REO) issue in California.

Re: “Senate Defeats Measure to Allow Bankruptcy Judges to Change Mortgage Terms” by the Washington Post