Back in March, we ran a blog post on how credit unions were worried about new “Cramdown” legislation, which would allow bankruptcy judges to reduce the principal in mortgages loans. Well, they need not worry any longer, at least for a time. The Senate just defeated the bill 51-45.

According to CNN, the financial industry lobbied pretty hard against the bill and the Senate received an avalanche of letters and calls from resentmentful mortgage holders in good standing.

Currently, there are no programs in place which allow the reduction in principal, though plenty have been proposed. This is a major problem for people who owe far more than their homes are worth. Indeed, I personally know of several friends who can afford to make their mortgage payments but are “underwater” on their mortgages by $100K+. One friend told me that “it just wasn’t worth it” to pay off a mortgage in which she was $175,000 underwater. She was willing to take the hit on her credit.

The Obama “Making Homes Affordable” program incentives include provisions for servicers to get $1,000 for each modified loan and more if the borrower doesn’t redefault. According to the CNN article, about 134,000 mortgages were adjusted in March, nearly 20,000 more than the average since September. However, it must be pointed out that the mortgage services were only willing to reduce interest rates, not reduce the principal.

Is there a chance of resurrecting this cramdown legislation? Probably not. The bill was not defeated strictly among partisan lines, 12 Democrats joined all of the Republicans in the Senate to vote against it. The banking industry has been lobbying hard in Washington against the bill saying that the cramdown legislation would increase the costs for all mortgage holders.

I do want to know from you readers – have any of you renegotiated your mortgages? How did it go?

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