Renegotiate Your Loan
Even as political pressure builds in Washington for a sweeping program to help struggling homeowners, some banks are realizing that it may be good business to keep borrowers in their homes.
On Friday, JPMorgan Chase became the latest big bank to pledge to cut monthly payments, by lowering interest rates and temporarily reducing loan balances for as many as 400,000 homeowners. Early in October, Bank of America, which acquired the large lender Countrywide, announced a similar effort aimed at 400,000 borrowers as part of a settlement with state officials.
Though the measures encompass only a fraction of the nation’s troubled homeowners, analysts say they could become more instrumental in stemming the rising tide of foreclosures than the government’s plan to partly guarantee home loans.
“The banks are doing the cost-benefit analysis,” said Gerard S. Cassidy, a banking analyst with RBC Capital Markets. “The banks don’t want these customers going into foreclosure because it is a costly and punitive way of trying to collect your money.”
Roughly 1.5 million homes were in foreclosure at the end of June, and economists expect several million more borrowers may default in the coming year as housing prices erode and job losses rise. Nearly one in 10 mortgages is either delinquent or in foreclosure.
Chase officials said their effort was not an act of charity or a response to government pressure. By renegotiating loans with borrowers, the bank is hoping to reduce the losses that it incurs in the foreclosure process and when it sells repossessed homes. Chase said it has already modified 250,000 loans since the start of 2007.
“What we are doing is a process that just makes a lot of sense,” said Charlie Scharf, chief executive of retail financial services at Chase. “If the government can come in and help us find ways to modify more people that would be wonderful.”
The bank, which will open 24 counseling centers and hire 300 employees to work with borrowers, will suspend foreclosures on loans it owns for at least 90 days while it puts its new policies into place at Chase and the two banks it acquired this year, Washington Mutual and Bear Stearns.
Like other banks, Chase is largely aiming at loans that the bank owns and not the mortgages that it services on behalf of bond investors who own mortgage-backed securities. Banks have less leeway in changing the terms of loans packaged into securities, because contracts that govern them can be very restrictive.
Those contracts could limit the impact of loan modification programs at Chase and other banks. For instance, Chase owns $350 billion of the $1.5 trillion in the home mortgages it services; the rest are owned by investors. Some hedge fund investors have threatened legal action if banks aggressively modify the loans that back bonds that they own. Mr. Scharf said the bank was working with investors to gain approval to modify more loans.
Chase’s effort resembles a plan put in place at IndyMac after the Federal Deposit Insurance Corporation took it over in July. Chase’s program closely mirrors that template by lowering interest rates on existing mortgages and temporarily reducing the principal owed on loans. The goal would be to lower a borrower’s housing payments to 31 to 40 percent of disposable income.
Sheila C. Bair, the chairman of the F.D.I.C., has said the agency may be able to help 40,000 of the 60,000 delinquent IndyMac borrowers. About 3,500 of those who have been approached have agreed to a modification. IndyMac owns most of those loans but it has been seeking permission from investors to modify other loans, as well.
But the steps being taken by banks on their own could affect a much larger pool of troubled homeowners.
“A clear consensus is emerging that broad-based and systematic loan modifications are the best way to maximize the value of mortgages while preserving homeownership — which will ultimately help stabilize home prices and the broader economy,” Ms. Bair said in a statement that applauded the announcement by Chase.
Mr. Scharf said Chase would also offer modifications to borrowers who were not currently delinquent but who the bank thought could be at risk of defaulting. For certain risky loans, it might offer to temporarily reduce interest rates to as low as 2 percent and calculate payments on a reduced loan balance for a few years.
Bank of America agreed to make similar changes under a settlement of predatory lending practices with officials from 11 states, and agreed to permanently write down the amount owed on some mortgages. HSBC, another big bank, is also pre-emptively providing relief to some borrowers and has modified nearly 25 percent of its subprime mortgages.
Mark Pearce, a banking regulator in North Carolina, said the government interventions at IndyMac and Countrywide were helping to set a good example for lenders like Chase that were now beginning to take a more aggressive approach to loan modifications.
“It’s clear that they have studied IndyMac and the Countrywide settlement,” said Mr. Pearce, who is a deputy commissioner for banks in North Carolina. “Those public programs are leading other servicers to rethink how they are approaching these issues.”