Massive Effort to Save Mortgages
By ROBIN SIDEL
J.P. Morgan Chase & Co. launched an ambitious plan Friday to modify
the terms of $70 billion in mortgages for borrowers who are behind on
their payments or soon could be.
The move by the New York bank will cover as many as 400,000 borrowers.
They'll be moved into loans carrying lower interest rates, smaller
principal amounts or other more-affordable terms.
The changes will particularly focus on a type of loan structured in
such a way that the borrower's outstanding balance sometimes grows
month after month. J.P. Morgan inherited $54 billion of such loans
with its takeover of the beleaguered thrift Washington Mutual Inc. in
September.
The plan comes amid intense national focus on a root cause of global
financial turmoil: rising home foreclosures, and what the role of
banks and government should be in helping struggling homeowners. The
banking industry is under much political pressure address the
foreclosure problem.
Rival Bank of America Corp. has two loan-modification pools in place,
one hashed out with state attorneys general. At the government level,
after other programs failed to halt the rise in foreclosures, the
Federal Deposit Insurance Corp. recently floated a plan that could
help three million troubled borrowers; it is being considered by the
White House. The FDIC also is assisting strapped borrowers who had
mortgages with IndyMac Bancorp, which the FDIC seized this summer.
(Please see related article.)
Such moves would tackle one of the last elements of the global
financial upheaval as yet untouched by a major federal program. The
mortgage crunch that began in the middle of last year spawned the
financial crisis. Big financial players had invested trillions of
dollars in securities backed by risky mortgages, which starting in
mid-2007 became difficult to value. Banks hobbled by these bad
investments reined in lending, spawning the wider credit crunch as a
result.
The U.S. government has tackled problems in the banking system and
credit markets, but thus far hasn't succeeding in stanching the
bleeding of failing homeowners. Economists and government officials
agree that the economy and financial markets can't fully revive until
there's a halt to the decline in housing prices, a phenomenon that is
worsened by foreclosures.
"It doesn't make sense for us to wait" to tackle the problem, said a
J.P. Morgan executive, Charles Scharf. "We've heard loud and clear and
are listening to what some of the thought leaders around the country
are saying." Mr. Scharf runs the retail division, which includes
mortgages and branch banking, at J.P. Morgan, the largest U.S. bank in
stock-market value.
The move also suggests that banks are realizing they can improve the
value of their loan portfolios through mass modifications rather than
foreclosures, which tend to produce larger losses. Until now, mortgage
holders have been reluctant to renegotiate loans or have been doing so
one-by-one, a time-consuming process. The bundling of loans into
securities that are then sold to investors further complicates matters.
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. "The
precedent has clearly been set and we can expect to see more of
these," he said.
Nationwide, 7.3 million American homeowners are expected to default on
their mortgages between 2008 and 2010, about triple the usual rate,
according to Moody's Economy.com, a research firm. Some 4.3 million of
those are expected to lose their homes.
J.P. Morgan's exposure to the problems increased sharply when it
acquired the assets of the Seattle-based Washington Mutual. WaMu,
which was seized by regulators, had a large exposure to the difficult
housing market of California. In taking it over, J.P. Morgan acquired
$16 billion of subprime mortgages.
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. The
plan expands upon programs already in place at the bank to help
strapped homeowners.
The bank's Mr. Scharf declined to estimate the plan's financial impact
on the bank. "Our goal in doing this was to come up with something
that we think will lead the industry in helping as much as possible on
this issue," he said.
J.P. Morgan's push is especially aimed at so-called option
adjustable-rate mortgages, or options ARMs. These allow borrowers to
make a minimum payment that may not even cover the interest due --
resulting in a higher loan balance.
Under the plan, option ARMs that are accumulating interest will be
replaced with fixed-rate loans that are more stable for borrowers and
seen as far less likely to default. J.P. Morgan said it wouldn't begin
the foreclosure process on borrowers during the next 90 days, as it
opens loan-counseling centers and takes other steps to launch the program.
J.P. Morgan unveiled the plan days after receiving $25 billion in
federal capital from the Treasury's program to shore up financial
institutions and get credit flowing. Mr. Scharf declined to comment on
whether the bank would use any of those funds for the mortgage
overhaul. "The stronger you are, the more willing you are to spend
money and do a whole series of things," he said, noting that the
government cash "certainly makes decisions easier."
Of the two loan-modification pools at rival Bank of America, one
targets 265,000 borrowers with all types of mortgages. The other was
hashed out with 14 state attorneys generals and involves 400,000
subprime and option-ARM customers serviced by the big lender
Countrywide Financial Corp., which Bank of America purchased July 1.
Another big rival bank, Wachovia Corp., acquired roughly $120 billion
of option ARMs as part of its 2006 purchase of Golden West Financial
Corp. Wachovia initiated a loan-refinancing program before agreeing to
its pending takeover by Wells Fargo & Co. That effort targets the
option-ARM portfolio.
J.P. Morgan's plan drew cautious optimism from Iowa Attorney General
Thomas Miller, who recently called on mortgage lenders to launch broad
loan-modification programs.
John Taylor, chief executive of the National Community Reinvestment
Coalition, called it "a gutsy move on their part," adding : "They are
bending over backward to try to reach out to these people." The
coalition represents 600 community groups and has urged the government
and industry to help homeowners.
Republican presidential candidate John McCain has gone further than
any program in place, proposing a to have the government buy $300
billion in troubled mortgages outright.
[JP Morgan announces loan modification]
Damian Paletta and Dan Fitzpatrick contributed to this article.
Write to Robin Sidel at [EMAIL PROTECTED]
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