Unintended Consequences will Produce More Foreclosure Losses with Higher Severity in Bubble States

Legislation that would have resulted in Bankruptcy Cramdowns is dead, see  "Cramdown Bill Fails in Senate" . This is old news now, but what makes it important is that it may have been the last opportunity consumers had to create any pressure for mandated reductions of mortgage principal on first mortgages and the legislation probably will not revive thanks to the continuation of totally pro-banker policies from the Clinton and Bush administrations  by the Obama administration. So much for campaigning on a platform of "Change".
As methods go, Cramdowns were a poor substitute for lenders/investors doing what they know they should do, which is to take principal reductions (meaning current financial losses) and keep people in their homes, in performing loans with lower interest and values. Lenders have attempted to create a kind of shadow market for exotic loans through the Loan Modification process and have stayed focused on extending terms and reducing interest on current balances, rather than recognizing current values and losses.

The death of this legislation removes one of the last potential barriers for bubble markets to continue their downward spiral.  Other barriers that remain are the REO pricing policies of Asset Managers and Servicers who have yet to recognize the true loss severities occurring in the marketplace when they fail to properly price REO properties. There may be many reasons for the failure to recognize reality which are political or governed by concerns over share prices. It is still my belief that the lenders that understand and act based on real time data will keep losses far lower than those who do not.
No legislation in the world or gamesmanship by lenders will keep SFR properties from seeking a sustainable pricing level based on local employment and income, availability of loans and the cash position of buyers.  See "How Low Can Prices Go" .

Sales in the marketplace have been somewhat propped up by entry level buyers. What magic will allow move-up and high end buyers to purchase larger (even if deeply discounted to the market) properties if there is no cash or financing available above conforming loan limits? The inability to leverage alone will continue to drive pricing down in higher priced areas until the prices are sustainable to suitable buyers, either for personal occupancy or for investment. 
I have spoken in past entries about the "kick the can down the road" approach of the bankers to dealing with insurmountable price deflation in Single Family housing, especially in the Bubble areas of CA, NV, FL and AZ. Today there is still little open recognition of the underlying problem and banks are underreporting losses by not taking them or using other gimmicks to prop up current stock valuations in the short term.

By the way, one of the thought leaders in the area of recognizing pricing reality is Mark Hanson of the Field Check Group in California www.thefieldcheckgroup.com. Mark is a wizard at analytics and has a clear view of the future and the tools to offer serious investors willing to pay for good information before investing.

The Bottom LIne
Unless or until the parties that control loans and REO properties get real in their evaluations and deal directly with proactive reductions in principal balances, the mess will continue, with prices spiraling downward and probably over-correcting in many areas, creating opportunity for educated buyers with cash and financial disaster for owners who can't walk away, even when they should.