Loan Modification

Banker?s Choose not to Swallow Obama?s Loan Modification Bitter Pill

By Andrew

Exceptional times call for exceptional measures. That was the reasoning behind the bailout of the big banks and insurance companies. We had to swallow the bitter pill of using taxpayers money to bail out corporate America. It was after all in the interest of the American economy. However, this reasoning does not seem to apply to loan modifications.

Obama’s loan modification revamp includes cutting the principal balance of millions of mortgages in the United States. These cuts are aimed at chipping away at the negative equity of underwater mortgages. These mortgages are worth more than the market value of the houses they are paying for, and are the main force behind the rising number of foreclosures.

Obama’s administration is talking to the leaders of the top banks and servicers and telling them they need to cut back on the principal balance of underwater mortgages. Although banks like BoA, Citigroup, Well Fargo,  and J.P Morgan Chase accept the need of reducing the principal balance in some situations they will not accept it as a generic measure for all underwater mortgages.

This is not a surprise because the measures suggested by the government would be very expensive. Currently there are over 11 million underwater mortgages. Cutting back the balance of these mortgages to their current value would cost the American taxpayer $700 billion to $900 billion according to the CEO of Morgan Chase Home Lending, not to mention what it would cost banks. Let us not forget that Fannie and Freddie, the government chartered and sponsored leader of the secondary mortgage market, would also have to absorb a chunk of the losses that could amount to up to $150 billion.

Not surprisingly banks do not think this would be responsible or even beneficial for homeowners. In fact Morgan’s CEO is also quoted as saying: “such programs could be potentially very harmful to consumers, investors and future market conditions”. It is nice to have the banking community taking an interest in the consumer’s interest. I guess the $700 billion bank bailout was in the consumer’s interest, so it was money well spent.

This is not to say that big banks are not willing to provide principal balance cuts on principal. Bank of America has famously promised to offer balance cuts to 45,000 homeowners that are in serious financial difficulties, with subprime loans and seriously underwater. Banks are apparently scared of creating a default avalanche if consumers get wind of the possibility of reducing their mortgage balances by thousands of dollars if they default on their mortgage payments.

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Related posts:

1. Underwater Mortgages and the Science of the Perfect Loan Modification
2. Commercial Loan Modification Companies: How To Choose A Good Loan Modification Company
3. Loan Modifications on Steroids: BofA Principal Forgiveness Analyzed.

1. Underwater Mortgages and the Science of the Perfect Loan Modification
2. Commercial Loan Modification Companies: How To Choose A Good Loan Modification Company
3. Loan Modifications on Steroids: BofA Principal Forgiveness Analyzed.

Full post as published by Blown Mortgage on April 18, 2010 (boomark / email).