Two of the nation’s biggest lenders,JPMorgan Chase and Bank of America, are quietly modifying loans for
tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk.
Rula Giosmas is one of the beneficiaries.
Last year she received a letter from Chase saying it was cutting in half the amount she owed on her condominium.
Ms. Giosmas, who lives in Miami, was not
in default on her $300,000 loan. She did not understand why she would receive this gift — although she wasted no time
in taking it.
Banks
are proactively overhauling loans for borrowers like Ms. Giosmas who have so-called pay option adjustable rate mortgages,
which were popular in the wild late stages of the housing boom but which banks now view as potentially troublesome.
Before Chase shaved
$150,000 off her mortgage, Ms. Giosmas owed much more on her place than it was worth. It was a fate she shared with a quarter
of all homeowners with mortgages across the nation. Being underwater, as it is called, can prevent these owners from moving
and taking new jobs, and places the households at greater risk of foreclosure.
“It’s a huge problem,” said the economist
Sam Khater. “Reducing negative equity would spark a housing recovery.”
While many homeowners desperately need help to keep their
homes and cannot get it, the borrowers getting unsolicited relief from Chase sometimes suspect a trick. Cutting loan balances,
even for loans in default, is supposedly so rare that Federal Reserve economists wrote in a paper in March that
“we could find no evidence that any lender was actually reducing principal” on mortgages.
“I used to say every day, ‘Why
doesn’t anyone get rewarded for doing the right thing and paying their bills on time?’ ” said Ms. Giosmas,
who is an acupuncturist and real estate investor. “And I got rewarded.”
Option ARM loans like Ms. Giosmas’s gave borrowers
the option of skipping the principal payment and some of the interest payment for an introductory period of several years.
The unpaid balances would be added to the body of the loan.
Bank of America and Chase inherited their portfolios of option ARMs when they
bought troubled lenders during the housing crash.
Chase, which declined to comment on its program, got $50 billion in option ARM loans when it bought
Washington Mutual in 2008. The lender, which said last fall that it had dealt with 22,000 option ARM loans with an unpaid
principal balance of $8 billion, still has $33 billion of them in its portfolio.
Bank of America acquired a portfolio of 550,000 option ARMs
from its purchase of Countrywide Financial in 2008. The lender said more than 200,000 had been converted to more stable mortgages.
Dan B. Frahm, a spokesman
for Bank of America, said it was using every technique short of principal reduction to remake its loans, including waiving
prepayment penalties, refinancing, lowering the interest rate, postponing some of the balance and extending the term.
“By proactively
contacting pay option ARM customers and discussing other products with better options for long-term, affordable payments,
we hope to prevent customers from reaching a point where they struggle to make their payments,” Mr. Frahm said.
Chase, Bank of America
and the other big lenders are negotiating with the Obama administration and the nation’s attorneys general over foreclosures.
Debt forgiveness and the moral hazard question of who deserves to be helped are among the most contentious issues.
The banks say cutting mortgage balances
would be unfair to borrowers who remain current as well as impractical because so many loans are securitized into pools owned
by investors. Bank of America’s chief executive, Brian T. Moynihan, told the attorneys general in April that cutting
principal for current borrowers would send the wrong message to all those who have struggled to pay their bills. His counterpart
at Chase, Jamie Dimon, bluntly said it was “off the table.”
Having an option ARM loan, however, apparently qualifies the borrower for special
help. The loans, with their low initial payments and “teaser” interest rates, were immediately popular with buyers
who could not afford or did not want to pay the soaring prices on houses. The problem was, eventually the rate would reset
or the loan balance would have to be paid in full. “Nightmare Mortgages” they were called in a 2006 BusinessWeek
cover piece.
Option
ARMs were never quite as bad as predicted, partly because the crisis pushed down interest rates so far that the resets were
relatively mild. Many owners did default on them, but others, like Ms. Giosmas, were quite happy to pay less for years than
they would have under a conventional loan. She used option ARMs on her investment properties too.
“They saved me,” she said.
“Why would I want to pay a lot more every month? I’d rather have it in my pocket.”
The concern the banks are showing for
those who might get in trouble contrasts sharply with their efforts toward those already foreclosed. Bank of America and Chase
were penalized last month by regulators for doing a poor job modifying mortgages in default.
Adam J. Levitin, a Georgetown University law
professor, said these little-publicized programs were more evidence that the banks were behaving in contradictory and often
maddening ways.
“Loan
modifications that should be happening aren’t, while loan modifications that shouldn’t be happening are,”
he said. “Homeowners of any sort, whether current or in default, would rightly be confused and angry by this.”
The homeowners getting
new loans, however, are quite pleased. In effect, the banks are paying the debt these owners accrued as the housing market
plunged.
Ms.
Giosmas bought her two-bedroom, two-bath apartment north of downtown Miami for $359,000 in early 2006, according to real estate
records. She made a large down payment, but because each month she paid less than was necessary to pay off the loan, her debt
swelled to about $300,000.
Meanwhile, the value of the apartment nosedived. By the time Ms. Giosmas got the letter from Chase, the condominium
was worth less than half what she paid. “I would not have defaulted,” she said. “But they don’t know
that.”
The
letter, which Ms. Giosmas remembers as brief and “totally vague,” said Chase was cutting her principal by $150,000
while raising her interest rate to about 5 percent. Her payments would stay roughly the same.
