A lot of effort has been made trying to encourage lenders to work out bad loans. It seems simple enough. Housing prices are falling. Lenders will lose money in foreclosure, so why not modify the loans and create a win-win for both borrower and lender? One thing that’s complicating loan modifications are the problems with 80/20 loans.

These so-called piggy back loans were common for no money down, no documentation subprime loans. One lender made a home loan for 80% of the homes’ value, another lender made a loan for the remaining 20%. With home prices in some parts of the country down, those 20% second loans are worthless. The holder of the 80% loan may be willing to change the terms of a loan to keep people in their homes, but the lender who now has a worthless loan may not be so quick to give up.

Eric Halperin of the Center for Responsible Lending says the only proposal that would address these situations is the bankruptcy proposal. The Mortgage Bankers Association opposes letting bankruptcy judges modify loans, calling them cram downs. It looks like whatever compromise comes out of the Senate tomorrow won’t include that provision.