Mortgage cram-downs unlikely to be part of homeowner bailout

Good news from the U.S. Senate:

Legislation to give bankruptcy judges the power to reduce home mortgage debt–by “cramming down” the principal–doesn’t appear to have enough votes and will be stripped out of a broader housing bill in the Senate.

The cram-down effort is a major plank of President Barack Obama’s housing rescue, which also offers financial incentives to mortgage servicers to modify loans and allows some homeowners with little to no equity to refinance. ...

Monday, Dow Jones reported that the Senate will instead vote on the cram-down legislation as an amendment to the rescue bill, with all Republicans opposing the provision together with at least a couple of Democrats.

Elizabeth Warren, who heads a watchdog panel for the Troubled Assets Relief Program, told a financial regulation forum on Monday that failure to include the measure would blunt the Obama administration’s housing recovery efforts.

I wouldn't mind if cram-downs became law for future mortgage contracts, but politicians shouldn't be arbitrarily changing the terms of existing contracts. In the long run, government meddling is harmful to the economy.