Mortgage modification nation: Gentlemen, start your engines

The mortgage modification movement is poised for a big jump off the starting blocks with the Friday announcement by JP Morgan Chase & Co. of plans to modify terms on $70 billion in home loans for as many as 400,000 borrowers, according to today's Associated Press article in the Los Angeles Times and a longer article in the Wall St. Journal.

Borrowers behind on their payments or about it be -- particularly those with option adjustable interest rate mortgages, a.k.a. options ARMs, that result in negative amortization -- could be moved into loans with lower rates or smaller principal amounts owed.

JP Morgan joins other lenders taking a similar course, including Bank of America and Wachovia.

Reports the Journal:

"The move ... suggests that banks are realizing they can improve the value of their loan portfolios through mass modifications rather than foreclosures, which tend to produce larger losses. Until now, mortgage holders have been reluctant to renegotiate loans or have been doing so one-by-one, a time-consuming process. The bundling of loans into securities that are then sold to investors further complicates matters."

Foreclosures will be put on hold for 90 days while the modification process is put into effect. That's a long road ahead.

--Lauren Beale

Thoughts? Comments?

Photo: JP Morgan Chase headquarters in New York. Credit: Mark Lennihan / Associated Press

Comments

[DLE]

A strategy that shifts variable "rate" loans (ARM's and the like) to some form of variable "term" loans probably would have been advisable ages ago. Given that interest rates are far more subject to short term fluctuations than the duration of a loan but will have a relatively heavier impact on premiums and thus consumer income--in particular in times of financial stress--the latter strategy affecting the duration of a loan seems far better suited to dealing with the fluctuations of the market. As long as the term of a loan is subject to market fluctuations in both directions, i.e. it can shorten with improved circumstances and lengthen with worsening economic circumstances, it should be acceptable to both the banks who offer them and to consumers who prefer them over potentially superior fixed rate and premium loans. Now for the 2 trillion dollar question: would we be in this financial and recessionary mess if someone had dreamed up such a strategy say 2 years ago...? And who is going to come to the rescue of all those who have already lost house and home...?

[Jo]

Well of course the value of loans, termed assets and not liabilities which is really what they turned out to be, was always artificially inflated, so like many home owners, as long as you stay in your home, you should see the course. Trouble is banks used the loans values as collateral to finance their risky ventures, same as home owners used their homes at ATM machines. That's what has to be be washed out through the system. Small growth looks like the order of the day for financials.

[guesswhotoo6]

www.lawlibrary.state.mn.us/CreditRiver/CreditRiver.html

Here is what the mortgage industry is really up to...

[cesar]

THIS IS A GOOD START TO STOP FORECLOSURES! PROPS FOR JP MORGAN, CHASE, BANK OF AMERICA, ETC.

BUT WHERE IS HOMECOMINGS FINANCIAL MORTGAGE A GMAC COMPANY! HELP TROUBLED HOMEOWNERS TOO! STOP MY FORECLOSURE!

[CAROL]

PROPS FOR THIS BANKS HELPING TROUBLED HOMEOWNERS STAY IN THEIR HOUSES! HOPEFULLY OTHER BANKS FOLLOW THEIR FOOTSTEPS!

WHERE IS HOMECOMINGS FINANCIAL MORTGAGE A GMAC COMPANY? PLEASE STOP FORECLOSURES TOO! DO NOT KICKED US OUT !

[LIL PEARL]

HOMECOMINGS FINANCIAL MORTGAGE A GMAC COMPANY STOP FORECLOSURE ON MY HOUSE TOMORROW NOV. 3, 2008! DO NOT KICKED US OUT! WE DON'T A PLACE TO GO TO!
http://www.youtube.com/watch?v=PaX7o2k6Ifc

[PEARL]

HI FIVE TO ALL THESE BANKS HELPING TROUBLED HOMEOWNERS! FORECLOSURES DON' T HELP AT ALL, IS JUST ANOTHER VANDALIZE HOME DOWN THE STREET.

BUT WHERE IS HOMECOMINGS FINANCIAL MORTGAGE A GMAC COMPANY? HELP STOP FORECLOSURES TOO!
http://www.youtube.com/watch?v=PaX7o2k6Ifc

[tew]

Obama was wrong.

There really are "two Americas".

One is comprised of people who work, pay their bills, live within their means, and pay taxes. Though often active in charities and civic duties they usually don't have time to "game the system" and figure out ways to get taxpayer money for their personal use.

Another is comprised of people who get away with crime, fraud and deceit, often get money "under the table" to avoid taxes, and have various NGO and non-profit proponents that help them avoid consequences of their actions. "Gaming the system" is second nature.

[John]

Not sure that modification of mortgages is a great idea. Based on some numbers indicating the number of folks underwater on their mortgages and the general short sided feelings of borrowers who is going to take even a momentary loss?

The ironic thing is that people were by and large betting on the come about pricing going up, and were de facto buying on the margin. No money down, and watching their non-investment increase at a rate of 50+ K per year. Now that it is swinging the other way people are walking away. Wouldn't work in the stock market.

Makes me wonder, since I avoided this mess by not buying a home, what is the government going to do about correcting the losses I have faced in my investment portfolio. If all these folks who took out mortgages without any thought about paying them back are getting all sorts of assistance shouldn't I also get some aid to make up for my losses? Shouldn't folks who avoided becoming a part of this problem be compensated?

After all I couldn't very well do an equity advance on my pseudo profits and buy a SUV or take a trip...

Doesn't quite seem like the most equitable solution for everyone.

In the end the people smart enough to avoid this bubble by not taking part are the ones who are being screwed the most.

[Cal]

We will definitely see a lot more intentional defaults as words spreads and everyone wants their piece of the handout. What is funny is I bet there will be people who default who wouldn't qualify for a mod and so they will just have bad credit and the same mortgage. The plan for the banks is to keep as many people paying for overvalued assets as possible. It is actually a horrible idea for the borrower but the banks want to create the idea that the borrower is getting something for nothing. When it is in fact the bank that is gaining far more.

[stwf]

This wil never work. Why would anyone take a 40 year mortgage on an underwater house. You can just buy a house thats apprpriately priced and walk from your underwater house.

Also be prepared for thousands of people perfectly able to pay their mortgage going into default just to get their hands on the free money...

[Cathie]

This whole article is a bunch of lies. BOA is not interested in adjusting loan balances or rates unless you have already stopped making your mortgage payment and only if you have an ARM. Then, they will maybe give you 5 years at the current rate and then it will adjust. Most you're doing is getting 5 more years paying a mortgage on a house that is under water. I can pay my mortgage, although it is steep as property taxes keep going up when they should be going down, I lost my job and now make less then I did when I bought the house, and I had some unexpected medical bills to the tune of 20K, but as I bought in 2006, my home is now down at least 40% - seriously thinking about walking after I seek council from an attorney.

[Robert]

I an not believe all the hate in people! As a comment from one affected by the automotive industry, well educated with an MBA and totally resposible to purchase a moderate $217K home and then lose a job unexpected one day - the reserves go quick. This is the type of people that they should be helping - they have to set criteria and see that for years everything was on time, prove they are having hardship such as job loss and recognize it's a temporary harship. Not approve all these leaches that are still employed, making the same they always have made and deciding "I'm just not going to pay so I can fall into the harship bucket and get lower payments" that is the ones that should be losing thier homes for risking something and trying to get in on the "free" boat for people that really do deserve it. There are very intelligent, responsible, well educated and talented people out there losing jobs with budget cuts that really could have never planned for such a time. And to be one that loses a good job they worked so hard for all their life and have it so extremely hard to find another job after spending every wakeful hour for weeks on end sending resumes to every possible prospect, and for them not to be helped and you people say they should not be helped - shame on you!! This is not going to cost you a penny out your own pocket. It will better your everyday lives in the long run. Yes, those people that should not be approved for the adjustment should be cut out of consideration with some sort of criteria, I totally agree. But for those families that really are legit and follow the straight and narrow that really do need it, go for it!!

There are way too many judgemental people in this world, they judge for people being in different situations, different backgrounds, different looks and different ways of life. There are too many trying to abuse the system. Then you have the ones in the middle that are lucky enough to make it through the crunch, they should be rewarded for doing well too, but at the same time they should not be judging those at the bottom or the top. Everyone has a unique set of circumstances that until you walk in those shoes you have no right to judge. So yes, there will be those few leaches that trick the system, but there always is with EVERYTHING in life. Let the banks try and least same some of the good poeple and stop judging everyone in one general bucket, you have no clue how bad things can rapidly become from neighbor kids not having food after parents both worked all their lives since the age of 12. What is wrong, look back historically and see how this was allowed to happen and learn from it and fight to not let it happen again, not judge the good decisions that are being made that will help hundreds of thousands that really need it. Wake up America, life is what we make of it, bitterness and discrimination only make things worse! If one of you that wrote all the negative hate comments woke up one day and realized you could not go to the store and buy miilk for you kid alll of the sudden, after paying on student loans you took out for $100K to make a good life for your family and having a very moderate house and working your butt off to get there, then come back and reconsider what you wrote - I'm sure your views would change when it hits home directly with you and you won't be saying "my neighbors tax dollars mean more to me than my child eating". America is going down the tubes at this point as a result of all the greed and hatred, people need to understand the real values and things going on here before things can ever change. My point, before judging people you don't even know the circumstances of on something that does not directly affect your life, have some understanding that not everyone is out to get something for free. We can help other starving countries with BILLIONS in support without people even knowing about it or caring, but when it comes to home the issues get more realized and there are too many stupid people making comments that are totally irrelevant. What a waste of breath for you all. So all you "Mr/Mrs perfect citizens", look in the mirror!! It's like the poor kid in school that got a free lunch and you are behind him saying "i want to keep my $2 and get a free lunch too, it's not fair and I'm going to cry about it", that is NOT what this is meant to be! Not asking for everyone to give free hand outs, and I definately would not want to see free hand outs to the slackers that skidded through life, but even more sad is people don't understand, let nature take it's course and hope for a better world with less greed and segregation in the near future!!! The lazy trick the system people can lose it all for all I care, but please shut up before you know, relate to and understand all the real problems that truely are happing in such a screwed up world today!

[Victor]

“Walking away from home” if the loan amount is higher then the current price of property is not the best strategy. First of all you will loose down payment (if there was any). Secondly you will destroy your credit history. So for next seven years you will have to wait for your credit history to clear and to accumulate new down payment. With new mortgage standards there is no way you can get house with bad history and no down payment. And if you consider to abandon your mortgage today and get another in 7 years you need to look at prices of the houses in 7 years and how you are going to pay the last year of mortgage 36 years from now. Add the historically low interest rates today and uncertain rates in seven years and add the rent payment for seven years and it all does not sound like a clear chose any more. What surprises me, I see some economist give this idea to walk away from the house and do not give any explanation about consequences. I am pretty sure these are the same “economists” who did not see the .com and then housing bubble coming. So for the love of god, please explain people what the consequence of the walking away from the house are.

[Cathie]

How about this: as a condition of the "modification," the bank takes full legal title to the home and the occupant pays the bank monthly "rent," to be applied to the principle balance on the loan. The bank becomes the legal owner of the property until the outstanding principle is repaid. The bank writes off the interest income it would have received.

That would give the occupants a clear incentive to keep paying. It would also stop people from intentionally letting their homes go into default out of some misguided sense of revenge.

[Noz]

What utter bull from both sides. People took risks....they lost. Simple as that. What next...give the money back I'm losing in the stock market? Give my money back because I can't sell my car for the amount I believe it's worth?

This is stupid. NO ONE should be bailed out. Even the sensible people. They also took a risk...you bought a house, your home price went down....DEAL WITH IT.

Anyone who walks away should NEVER be allowed to buy another piece of property in their natural lives. Anyone who committed fraud should be sent to jail for at least 5 years AND never be allowed to buy property again.

Anyone who's honest and hard-working and bought a house with no intentions to move or make money in the short time....I'm sorry. You'll live and learn the next time.

That's it. That's life.

Stop freaking whining.

[Cathie]

In response to the first comment above, you could apply the same argument to the purchase of a new car. Why would anyone keep making car payments if the car is depreciating in value with every passing month? (which is certainly the case for every new car driven off the lot). The reason is, they want to keep the car. Whether they are "upside down" is irrelevant. You need a place to live. You pay for that. Paradigm shift alert: Your home is not an ATM or a retirement plan.

[Mr Mortgage]

This may work well on Pay Options because a) the ratings agencies have already cut these leading to banks having to write them down b) Chase writing them down at the time of acquisition.

Why wait for them to default when after the write down they only paid 50 cents on the dollar. If they drop pincipal balances on all of these by 40%, they come out ahead.

They problem is they likely won't re-underwrite these one by one using strict 28/36 DTI, which essentially kicks the can down the road. The favorite mod for banks is now just giving a borrower a 2% interest only for 5-years which will destroy the borrower 5 years from now.

Unless Chase re-underwrites each and every case this program will fail. Negative equity and over-leveraged borrowers is a nasty beast.

[doomsdayboy]

Sure. Modify your loan to save $500.00 a month. Widespread credit deflation is occurring and more jobs will be lost soon. Just like $2.00/gallon gas, $500 off your mortgage won't matter if you DON'T HAVE A JOB.

[Uncle Billy, Bitter & Sweet]

Pete Viles was just honored as top 25 Blogger for 2008 by inman

http://www.ritholtz.com/blog/2008/11/25-most-influential-real-estate-bloggers-2008/

[Rational Renter]

Words to describe mortgage modifications: Wildly stupid and irresponsible. Dangerous, immoral, and - worst of all - INEFFECTIVE.

Want the economy to get fixed? Let home prices CORRECT to sustainable, affordable levels. Enough with the sob stories about "people getting thrown out onto the street." B.S. They can rent like the rest of us. Foreclosures aren't the end of the world.

[Cal]

stwf :"Why would anyone take a 40 year mortgage on an underwater house. You can just buy a house thats apprpriately priced and walk from your underwater house."

Why I agree with the sentiment of the first sentence. The second sentence misses the fact that "buy & bail" has effectively been stopped by the lenders with the new guidelines. So unless you have cash for the next home you'll be waiting until the lenders are willing to give you a loan to get a new home. That is why I think "Rent & Run" will be the next option on deck. Stay in the house until the banks kicks you out (which is averaging around 8 months right now) and then go rent.

The banks WANT people to believe they are getting bailed out so they don't ruthlessly default. They are willing to forego a (minor) amount of interest costs so the borrowers stay in their overpriced asset and continue to pay.

[Laker]

Law of unintended consequences. Many borrowers that can afford their mortgages will feel that they are getting screwed and left behind paying top-over inflated monthly payments. They will stop paying and default just to qualify. Many of those, as CAL is saying, will not qualify as their income will not fall under the 38% DTI, or the opposite, they could not even afford the bank's best offer. So at the end of the day, they would either finish with more late fees, penalties, bad credit and same mortgage, or they will lose the house to foreclosure...
When you start offering free lunch, every body will want some. The banks and even the government could not print enough money to save all upside down mortgages and thus lead us to a great depression II.

[patient renter]

Bailing out homeowners is not only a moral quandary and the violation of our individual freedom, but in a market based economy such as ours it is counter-productive.

http://theredpilljournal.blogspot.com/2008/10/rationalizing-theft.html

[Steve]

I have five mortgages paid early, next month I stop paying and get on the band wagon for the modifications. Hell why be responsible. Again, in America to get ahead you get yourself in as much RE debt as possible and you will be bailed out. You are an idiot if you are responsible and saving the big down payment. You are will real idiot if you rent, these modifications alone will start to support RE prices. If you are a flake you win.