In my November 21st post, “It’s the Monthly Payment, Stupid,” I quoted Larry Anderson, a bankruptcy attorney in Washington DC, as saying, “[He] favors allowing bankruptcy judges to modify loan terms.” His point was that without the power to adjust loan terms, ergo, reduce the monthly payments, homebuyers were wasting their time trying to save their homes. If they can’t reduce the monthly payment, they can’t stay in the house.

Yesterday, key congressional Democrats announced a proposal that would make it easier for bankruptcy judges to do this very thing. It’s the old fashioned “cram down” scenario and I hate to say it but lenders had better wise up and be proactive and accept this fate. What’s the alternative? Take back the house?

Lenders need to take bull by the horns and proactively work out solutions with homeowners. After all, as Donald Trump once said, “owe the bank a million and the bank owns you, owe the bank a billion and you own the bank.”  Today, the “collective” homeowner(s) owns the bank.

Now before you scream and yell (like my business partner likes to do) and call this unjust, un-American, etc., there are two points to consider:

First of all, judges modifying loans happens every day in bankruptcy courts all over the nation.  However, it is usually the millionaire developer who files Chapter 11 and sticks the bank with a bad shopping center, office building or land loan. In this case, the developer is sophisticated and knows what they are doing. Typically, they are using the court as a tool to protect other assets. The same can’t be said for hundreds of thousands of homeowners. What we are seeing now, is quite a bit different.  Many of these homeowners are living paycheck to paycheck, have little or no savings and they aren’t trying to protect their beach homes and personal residences or retirement accounts. Their house in question is not their only asset, but the roof over their head. These are people who were sold homes with funny money mortgage products created by the very banks that now cry foul. It’s like the dope peddler who complains he isn’t being paid by the junky, that now is so strung out that he has no job and therefore, can’t pay!

Second, my partner points out that if judges can readjust home loans “who would ever lend on a home again.” I say, that hasn’t stopped the credit card companies or the auto loan companies from continuing to lend, and they default historically at much higher levels than home loans.

Now, I don’t mean to vilify the banks. In a lot of ways, they were the guys in the game of musical chairs who didn’t get a seat when the music shut off. As I have written many times before, Congress, who pushed Fannie and Freddie to buy up sub-prime debt, and Wall Street, who packaged and sold these products as safe, are just as much to blame. However, we have to deal with the issue at hand. More homes on the foreclosure list won’t make the problem better. Trying to keep the homeowner in the house is the best solution. And if a bank has to get crammed down a little to make that happen, then so be it.

Unfortunately, for many Americans who have lost their jobs and the many more that will before this recession is over, it just won’t be possible to work out a solution on their home.  The reason being, the bank can’t go under an “adjusted” market value. For these folks, I am truly sorry. The American dream wasn’t supposed to end up like this. But don’t give up hope. Use it as a learning experience and next time you won’t make the same mistake twice. Let’s hope the lenders won’t either.

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