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Bank Suspends Foreclosures for 90 Days

November 5, 2008

Posted by Roshawn Watson under Uncategorized

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By: Roshawn Watson

Going through a foreclosure can be a gut-wrenching and embarrassing experience. Unfortunately, it is also a reality that many over-stretched homeowners are facing. At least 40% of American homeowners are financially overextended, and over 2.2 million homeowners are at least 60 days late on their mortgages. The problem has infuriated so many homeowners that some resort to the buy and bail exit strategy, where homes are deliberately allowed to go into foreclosure. Recently, an Illinois sheriff made news by refusing to evict tenants from foreclosed properties stating “we won’t be doing the banks work for them anymore.” Like many financially-distressed Americans, he wants financial institutions and policymakers to get a handle on the housing crunch, which is what one banking conglomerate is attempting to do. JP Morgan Chase, who recently acquired Washington Mutual and EMC, will suspend foreclosures for the next 90 days as it implements its new loan modification plan, where some “bad” home loans are restructured.

JP Morgan Chase’s New Plan
JP Morgan Chase will attempt to modify the loan terms of 400,000 homeowners, which represents about $70 billion in loans. They intend to open 24 regional counseling centers and hire 300 new loan counselors (currently they have 2200). The program boasts of new financing alternatives, an attempts to reach out to borrowers with pre-qualified modification terms and a new process to independently review each loan before it is moved into foreclosure. They will proactively contact borrowers with the new restructured loans in hopes of modifying the loan terms. Also, JP Morgan Chase will eliminate pay option ARMs (adjustable rate mortgages), a disastrous loan product that allowed customers to lower their monthly payments by rolling it into their principle.

Preventing Foreclosures
A big strength of this program is that it stops customers from going into foreclosure without review of their unique circumstances. This is critical because in some cases all that is really needed is an adjustment of the terms. Even someone who is very diligent in paying their bills may get behind on their mortgage if it is eating up 40% of their income. It is perfectly reasonable to try to identify the true cause of the borrower falling behind (e.g. lost income, bad loan terms, sickness, lack of ethics, all of the above etc).

Decreasing Buy and Bail
Perhaps a side-benefit of this program is that it will give borrowers hope to continue paying. Home prices have been dropping faster than during the great depression. With so many people upside down in their loans (owing more on their homes than it is worth), it is very easy to become overwhelmed and want to walk away from the home. After all, it is a depreciating asset in some cases. Still, walking away is generally bad for both the borrower and the lending firm. For example, the borrowers’ credit goes in the toilet, their equity goes to the bank, and they may be held legally liable for the remaining balance on the home. Also, lenders lose a great deal of money because the value of the home may no longer cover the loan value. Thus, lenders will often accept whatever the house can quickly bring in and sue the previous owner for the difference. Thus, combating homeowner despair by working with those who are at risk is definitely a very good thing.

Good Public Relations
Many capital-strapped financial firms are rightfully under fire, so trying to help their clients stay in their homes is both a step in the right direction and good for PR. Still, it is unfortunate that it took this long. For example, 565,000 families have recently gone into foreclosure; it would have been great if they could have stayed in their homes and not had their credit trashed.

No More ARMs
Perhaps the aspect of the program that has the most far-reaching implications is their elimination of pay option adjustable rate mortgages (ARMs). These are absolutely awful financial products. They allow borrowers to defer part of their monthly payments. The difference is rolled into the principal they owed. Borrowers took these loans so that they could have lower payments, and this is also how many of them came to owe more on their homes than their worth. One in twenty homeowners owes more on his home than it is worth according to First American CoreLogic.

Overall, this restructuring of individual loans is very necessary because there were so many liberties taken in their creation. If more lenders follow similar models, these programs may have a significant impact for those whose mortgages are not yet in foreclosure.

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