What I think he is trying to say is that (the dates are examples):
The Hotmail team decided to truncate all passwords to 16 chars last month, but they only store the hashes of the passwords. So the plan is:
For each user, when it submits the login form with his username and password, do the following:
1. Compare the username and the hash of the password to the ones stored on the database
2. If they match, replace the current password hash with the hash of the first 16 chars of the password that the user just sent -- because at this moment, the plain text password is available in the login form
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So, the hypothesis is that the OP logged in successfully yesterday, then had its password replace, and today when he tried to login again he couldn't, because the hash was changed.