In a move the stock market greeted with considerable cheer, JP Morgan announced that it was widening its program to modify mortgages. From the New York Times:
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….
“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….
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.
We have stressed in this blog for some time that modifying mortgages is NOT charity; banks in the past have preferred to go that route when the owned the mortgage and had a borrower with some ability to make mortgage payments. And that was before trashing the house prior to eviction became popular.
The NY Times piece makes clear the mods will be limited to JP Morgan’s owned mortgages, not the one it only services. So that begs the question: if this is such a great idea, why the ramp-up now? Morgan had a program underway already, as again the article notes.
This all smacks of a hasty effort to pre-empt regulatory intervention, particularly with the FDIC’s Sheila Bair on the warpath to Do Something, JP Morgan having been forced to take an equity infusion from the Treasury, and a presumably-interventionist Obama administration likely to be on its way in.
But that still gets to the basic question: why would JP Morgan not do this voluntarily? While some readers think that too many borrowers are in debt too deeply for this to make sense, the flip side is there are some markets where the prospective losses on sale are so large that a meaningful reduction in the mortgage balance would still leave the bank ahead of the game for at least some borrowers.
I think the reas issue is different. Some further details from the Wall Street Journal:
The move by the New York bank will cover as many as 400,000 borrowers. They’ll be moved into loans carrying lower interest rates, smaller principal amounts or other more-affordable terms.
The changes will particularly focus on a type of loan structured in such a way that the borrower’s outstanding balance sometimes grows month after month. J.P. Morgan inherited $54 billion of such loans with its takeover of the beleaguered thrift Washington Mutual Inc. in September….
The move also 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.
So despite the use of mortgage counsellors, borrowers are NOT being assessed on an individual basis. I hate to sound like a perennial skeptic, but I doubt that these programs will be terribly successful (although pushing foreclosures off even two or three quarters will probably make the bank’s financials look better, and they presumably extract some more cash from the hapless borrower in the interim even if the mod fails).
Why is this program likely to score little in the way of success? Consider what created this mess in the first place: reliance on highly automated, credit score driven credit approval processes with little to no data gathering about borrowers’ ability to pay.
So how, pray tell, are these mass mods going to be made? We all know credit scores are not very useful guides. The mass approach suggests the bank will do no investigation into the borrower’s income, and perhaps will take a statement of income, length of time in job, type of job. But this is where the loss of local knowledge has put banks at a huge disadvantage. A lender in a community knows in the vast majority of cases how stable local employers are. And commitment to keeping the house is an important intangible that will not factor into these decisions.
The reasons mods historically have been done one on one is that the bank needed to assess both the likely loss on foreclosure and how much the borrower could afford to pay to decide whether a mod was likely to be viable and how to structure it. Here, it seems the banks have only very rough area parameters as to how much of a loss they might take on foreclosure, and a grossly inadequate reading on borrowers’ financial condition. Any successes will be random.
But perhaps I am not being cynical enough. The point may not be to make the mods work, but to claim that mass mods are the only option and then prove that they don’t work to forestall government intervention.