Noam Scheiber has a nice explanation of why mortgage cramdowns lost out in the Senate Thursday but safe harbor for mortgage servicers will probably make it into law.
Both provisions are about making it easier to change the terms of troubled mortgages—in particular by reducing the amount owed to reflect the collapse in home values over the past couple of years. In both cases, opponents objected that the changes mess with the sanctity of contracts and will discourage investors from buying mortgages, thus pushing rates higher than they would otherwise be. In fact, it’s far from certain that mortgage rates would rise as a result of either change. But no matter. Scheiber’s story is about the politics, not the merits:
With cramdowns, both the banks and investors (hedge funds et. al.) were united against giving bankruptcy judges the power to change mortgage terms, while safe harbor gives the servicers (a.k.a. the banks) freedom to make changes without fear of getting sued, so they’re all for it even though the investors hate it. And in Washington, divide and conquer remains perhaps the most important rule of political success. Safe harbor it is, then.