The US Senate voted down the “cram down” legislation that would have given bankruptcy judges temporary authority to write down the value of mortgages. Responding to the behest of the banking industry (recipient of hundreds of billions in taxpayer dollars) Republican senators and a dozen or so like-minded Democrats shot the bill down, even though a stronger bill had earlier passed through the House.
Bankruptcy judges currently have the authority to rewrite the terms of mortgages on second homes and yachts, but not for primary residences. The failed bill would have given judges the authority to rewrite mortgages to reflect current home values, albeit with significant caveats: banks must have refused to make fair offers to renegotiate loans, future profits on the home (if the owner sold in a rising market) would have been split with the banks, and the authority would have expired in 2012.
Advocates had argued that this was a critical element of any housing recovery plan in the face of plummeting home prices and unprecedented foreclosures and abandoned properties. They also argued that banks had to accept responsibility for making huge profits on bad loans for overvalued properties.