Saturday, November 01, 2008

Mortgage Lenders Seeking to Work With Homeowners, Not Against Them

Sources: Financial Times, JPMorgan to Freeze Foreclosures; BusinessWeek, JPMorgan Chase Freezes Foreclosures

On Friday, JPMorgan Chase unveiled plans to renegotiate $70 billion of U.S. mortgages and freeze foreclosures on homes for up to three months. Relief for 400,000 American homeowners comes in the form of reductions in interest rates, reductions in principal payments, and other modifications designed to ease constraints on shrinking bank accounts during the first major U.S. recession since the early 2000’s.

Though foreclosures were down in September from the month before, the rate of foreclosures is 21% higher than it was for the same period in 2007. More than 2.2 million homeowners are more than 60 days late in making their mortgage payments, nearly double the number one year before. JPMorgan plans to eliminate “pay option” loans and hire 300 more loan counselors (bringing the total to 2500), in 24 new regional counseling centers. Pay option loans are adjustable-rate mortgages that allow borrowers to defer part of their monthly payments, pushing the difference onto the principal. Such loans are attractive at the outset, but many borrowers are finding themselves unable to pay the larger amounts now, especially as their home values fall.

JPMorgan, having received government help in acquiring Bear Stearns and Washington Mutual, and having received $125 billion in federal investments from the government’s bailout plan, has already renegotiated $40 billion in mortgages—but the move comes on top of urging to lenders from the Bush Administration to “keep people in their homes.” Analysts say working with consumers to keep them in their homes (whose values are depreciating) is preferable to foreclosure, and is good for the company’s image and finances.

Citigroup and Bank of America have revealed similar plans, albeit on a smaller scale. Bank of America’s plan, focused on the loans from Countrywide, which it acquired in July, was announced as a settlement with attorneys general in eleven states to modify loans with 400,000 borrowers and give $8.4 billion in interest rate reductions.

Questions for Discussion:

1) Are these multi-faceted plans that include monetary aid as well as additional credit counseling a step in the right direction to changing the culture of borrowing in the United States?

2) Is this plan going to keep JPMorgan afloat when so many of its rivals have gone under? Is this good for consumers? Is this good for the markets?

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