Home Loan Wholesale

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 mortgage lender Countrywide, announced a similar effort aimed at 400,000 borrowers as part of a settlement with state officials. Wachovia initiated a home loan refinancing program before agreeing to its pending takeover by Wells Fargo & Co. The loan modification effort targets the option-ARM portfolio.

“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 1 in 10 mortgages is either delinquent or in foreclosure.

By renegotiating mortgage rates loans with borrowers, Chase 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.”  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.

Chase is following the example set by Sheila C. Bair, the Chairman of the Federal Deposit Insurance Corporation (FDIC). They are lowering interest rates on existing mortgages and temporarily reducing the principal owned on loans. The goal is to lower a borrower’s mortgage payments to 31 to 41% of disposable income—income after monthly debts are paid.

“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.

“A clear consensus is emerging that broad-based and systematic home 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.

The mortgages affected by J.P. Morgan’s program represent 4.7% of the home loans it owns or that are serviced by one of the bank’s units, EMC Mortgage Corp. While the program to give these mortgages easier terms is likely to cost J.P. Morgan billions of dollars in interest payments and loan fees, it is also likely to save the bank from the costly and lengthy process of foreclosing homes and selling them.

Up to this point, the Bush Administration has taken a top-down approach to trying to stimulate the economy. But, it hasn’t been successful because the problem that still remains untouched is the mortgage meltdown that started this financial crisis. Because of the big bank losses as a result of their investments investment of trillions of dollars in securities backed by risky mortgages, a wider credit crunch spawned, crippling the financial industry even further. Until now, mortgage holders have been reluctant to renegotiate loans or have been doing so one-by-one, a time-consuming process.

The announcement by J.P. Morgan steps up pressure on other mortgage companies to respond with relief programs for stressed borrowers, said Stuart Feldstein, president and co-founder of SMR Research Corp., a Hackettstown N.J., firm that specializes in consumer lending.  Sources: New York Times and Wall Street Journal