Reports have surface that Bank of America (BOA) and JP Morgan Chase have contacted some of their borrowers and volunteered to ease the terms of their mortgage with no questions asked. Could it be major banks have finally figure out that it is to the benefit of all parties to relieve the pressure many Americans face when it come to meeting their monthly mortgage payments?
Maybe an effort to get some positive headlines to offset the negative press these lenders have received over their failure to modify mortgages for hundreds of thousands of borrowers despite the presence of government –sponsored loan modifications programs.
Consumers with option adjustable rate mortgages make the likely beneficiaries of “angel modifications.” Option ARMs became very popular during the latter stage of the housing boom right up to the market crash in 2008.
Option Adjustable Rate Mortgages Targeted
Option adjustable rate mortgages allow borrowers to pay no principal. In addition, borrowers pay a reduce amount of the interest each month; the interest not paid gets tack onto the balance of the loan. Many borrowers – homeowners and investors, took on option ARMs because the low interest rate mortgage enable them to qualify for the loan. Many fully expect to refinance or sell the property in the hot real estate market before the mortgage interest rates recast. Other borrowers counted on their income increasing in time to meet the increase in mortgage payments when mortgage interest rates readjusted.
However, the economic crisis derailed the plans of many borrowers.
Both banks bought trouble mortgage lenders, such as Countrywide Financial and Washington Mutual that had significant portfolios consisting of option ARMS. Bank of America received about 550,000 adjustable rate mortgages when it purchased Countrywide Financial. A BOA official claims the bank has modified 200,000 of these loans into “stable mortgages.”
JP Morgan Chase took on $50 billion of ARMS on it books when it took over Washington Mutual. Chase said it reduced its inventory of bad loans by 22,000, which represents $8 billion dollars.
A BOA spokesperson said the bank uses a variety of techniques to modify loans with the exception of principal reduction. Its approach emphasizes refinancing mortgages, eliminating prepayment penalties, slashing mortgage interest rates, extending original mortgage terms, or postponing loan balances.
Slow Reaction to the Housing Crisis
Taking the initiative to modify these option ARMs before they reset makes good business sense for mortgage lenders. If borrowers encounter hardships, such as job loss or medical problems, the fallout will have less harsh consequences.
Many homeowners, consumer advocates, and housing and mortgage industry professionals have clamored for banks to take a more realistic and proactive approach to the foreclosure crisis. With almost a quarter of homeowners with “underwater” mortgages -- meaning the borrower has a home mortgage balance higher than the value of the home – the dynamics affect the ability of people to sale their homes, move or relocate to new jobs.
The number of distressed homeowners cass a shadow over the entire economy. Lending Processing Services (LPS) released the following figures on the state of foreclosures in America:
- Homeowners 30 or more days past due - 4,187,000
- Homeowners 90 days or more days past due - 1,921,000
- Properties in foreclosure presale inventory- 2,164,000
- Properties 30 or more day late or in foreclosure - 6,350,000
The last item in the series reveals the “elephant in the living room” scenario for the housing market and bears repeating -- 6,350,000 homeowners, 30 or more days delinquent, or in foreclosure.
What Happen to Programs Designed to Help the Masses?
While good news await homeowners who happen to get “chosen” by banks to have their mortgages modified, the gesture only helps a small percentage of borrowers in need of assistance. One has to question why the litany of programs designed to help distress homeowners, including the Home Affordable Modification Program (HAMP), never produced the expected results or why Congress canceled other programs or allowed them to expire. Billion of dollars allocated by Uncle Sam have gone unused for a multitude of reasons.
Were the programs ill-conceive? Why have so many people complain of loss documents, unreturned phone calls by lenders or going through foreclosure even though they wer in the process of mortgage modification?
First quarter numbers from the federal Office of the Comptroller of the Currency and the Office of Thrift Supervision (OCC), show that ten percent less homeowners received mortgage modifications in the first quarter of 2011, compared to the same period 2010. In addition, it fewer borrowers meet the criteria for mortgage modifications.
The OCC also reports fewer borrowers are behind on their mortgage and the private sector approves more loan modifications than government programs. OCC released these numbers after the news story about the banker’s “angel modifications.”
Time to Reach a Settlement?
Several months ago, the Obama Administration proposed a $30 billion settlement the five major lenders that hold 60 percent of the mortgages – Wells Fargo, Ally Financial, Bank of America, JPMorgan Chase and Citigroup. The plan involves reducing mortgage payments for as many as three million homeowners over a 180-day period. The plan accomplishes three things:
- Assist borrowers in trouble with their mortgages
- Bring stability to the housing market
- Punish lenders for abusive and fraudulent practices
According to LPS, this plan could help 3.1 million delinquent borrowers, who have not fallen into foreclosure, by reducing their outstanding loan balance or lowering mortgage payments.
Since this proposal, the banks have offered a $5 billion settlement.