Lenders have been quietly offering unrequested loan modifications or principal reductions on adjustable rate mortgages (ARMs) to borrowers who are not in default, according to the New York Times.
JP Morgan Chase (Chase) and Bank of America (BofA), who both inherited a sizeable portfolio of ARMs from lenders they bought during the housing crash, have determined certain borrowers to be at special risk of default. Their solution is to take steps necessary to keep those defaults from happening.
Many homeowners have reacted negatively to their solicitation for fear of a scam. Principal reduction is so rare that Federal Reserve (Fed) economists reported in March 2011 that they “could find no evidence that any lender was actually reducing principal” on mortgages.
Still, neither BofA nor Chase is willing to admit to any principal reduction. According to the lenders, taking this step would somehow be unfair to homeowners who remain current and send the wrong message to those negative equity homeowners who continue to pay their mortgage every month, which the lenders want them all to do.
first tuesday take: We won’t believe it until we see it. This double talk from lenders comes as no surprise, but their purported willingness to reduce principal certainly does.
Agreeing to a cramdown for one homeowner means all homeowners will be expecting the same grace, and lenders know better than to dig themselves into that ditch. A lender’s biggest fear is missing an opportunity to make more money, thus making cramdowns for negative equity homeowners who are still making payments a ludicrous idea and likely untrue. [For more information regarding cramdowns, see the January 2011 first tuesday article, The inconsistent cramdown policy and the January 2010 first tuesday article, Cramdowns, cramdowns, cramdowns!]
Readers, if you are or know of any homeowner who is not in default and has been approached by a lender for a loan modification or principal reduction, please let us know. We won’t hold our breath, but we will be happy to let everyone know if we are wrong.
Re: “Big Banks Easing Terms on Loans Deemed as Risks” from the NY Times