Even When They’re Right, They’re Wrong

So, the banks, some of them, finally figure out that (some) loan modification is better than the alternative:

Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk.

Rula Giosmas is one of the beneficiaries. Last year she received a letter from Chase saying it was cutting in half the amount she owed on her condominium.

Banks are proactively overhauling loans for borrowers like Ms. Giosmas who have so-called pay option adjustable rate mortgages, which were popular in the wild late stages of the housing boom but which banks now view as potentially troublesome.

Before Chase shaved $150,000 off her mortgage, Ms. Giosmas owed much more on her place than it was worth. It was a fate she shared with a quarter of all homeowners with mortgages across the nation. Being underwater, as it is called, can prevent these owners from moving and taking new jobs, and places the households at greater risk of foreclosure.

All well and good.  Option ARM’s, the particular class of loans the banks are now modifying, allowed  borrowers to pay no principal, and only part of the interest each month — with whatever interest they chose not to cover ending up as additional loan balance encumbering whatever poor structure to which it is attached.

Those are clearly financial anti-personnel devices,* and it’s probably not a bad idea to try and defuse some of them before they blow. Or at least that’s the reasoning reported:

Bank of America and Chase inherited [interesting choice of word, there, don’t you think? — ed.] their portfolios of option ARMs when they bought troubled lenders during the housing crash.

Chase, which declined to comment on its program, got $50 billion in option ARM loans when it bought Washington Mutual in 2008. The lender, which said last fall that it had dealt with 22,000 option ARM loans with an unpaid principal balance of $8 billion, still has $33 billion of them in its portfolio.

Bank of America acquired a portfolio of 550,000 option ARMs from its purchase of Countrywide Financial in 2008. The lender said more than 200,000 had been converted to more stable mortgages.

Dan B. Frahm, a spokesman for Bank of America, said it was using every technique short of principal reduction to remake its loans, including waiving prepayment penalties, refinancing, lowering the interest rate, postponing some of the balance and extending the term.

“By proactively contacting pay option ARM customers and discussing other products with better options for long-term, affordable payments, we hope to prevent customers from reaching a point where they struggle to make their payments,” Mr. Frahm said.

But the infuriating thing about this story is, of course, that the banks have chosen to help out loans (and people) not yet in deep trouble, but are witholding such aid from those who need it most:

The concern the banks are showing for those who might get in trouble contrasts sharply with their efforts toward those already foreclosed. Bank of America and Chase were penalized last month by regulators for doing a poor job modifying mortgages in default.

Adam J. Levitin, a Georgetown University law professor, said these little-publicized programs were more evidence that the banks were behaving in contradictory and often maddening ways.

“Loan modifications that should be happening aren’t, while loan modifications that shouldn’t be happening are,” he said. “Homeowners of any sort, whether current or in default, would rightly be confused and angry by this.”

So, while I’m glad that something is finally being done to modify loans made through one of the worst ideas in the history of finance, this story actually highlights the much larger failure to deal with the financial and social catastrophe of the broader failure of the home mortgage market. The foreclosure mess is a disaster because it simultaneously has generated a feedback loop of decline in many housing markets and it breaks communities.  Nothing good happens in a neighborhood where too many houses are unoccupied.

DFH’s (Atrios/Duncan Black comes most prominently to mind, but there are plenty of others) have been pointing this out for years now.  And at last, even The New York Times seems to be noticing, even as it documents what may be the first crack in the bankers’ resistance to grappling with their losses.

Welcome to the party, I guess — and, so as not to seem ungracious, let me not say “what took you so long,” to plead instead for much more attention on “the loan modifications that should be happening” to come.

*PS: no doubt, someone, somewhere (Brooks? Will?) must soon instruct us that these clever little monetary claymores were somehow the love-children of FDR, LBJ, Malcolm X, the Big Dog, and Howard Dean.  But, in fact, this is your invisible (and never-to-be-regulated) hand in action.

Image: Jan van Goyen, Peasant Huts With A Sweep Well, 1633

37 replies
  1. 1

    Ah yes, banks. Sometimes I think of them as a necessary evil and other times just as evil. They often offer some real and needed services, of course, but their handling of mortgages has been infuriating.

    And naturally they treat people with very little money worse than those with a little prosperity going for them. It looks like they don’t offer any help to those already in arrears because they want to hurry up and extract as much money as possible from these struggling people before the troubled borrowers drop out of the system altogether. Sort of like sucking blood out of a dying animal. Gotta have that living blood.

    Bah. Off with their heads.

    Just sign me: Used and abused by mortgage lenders and still angry about it.

  2. 2
    Cermet says:

    Insane loans – why wouldn’t any sane person just walk away from such organized robbery – these pigs giving out such so-called loans have little on armed thugs.

  3. 3
    Rhoda says:

    I saw Larry Crowne last night and the character choose.to walk away from his mortgage. This was played as a good thing against the evil banks. People are angry and attitudes that didn’t exist during the initial part of the crisis have developed. The banks are trying to deal with the next round of people who they feel are heading to foreclosure because they recognize that these folks may walk away, screwing them. And if enough people walk, that destroys the bank.

    This is necessary given the Mers mess and scope of the crisis.

  4. 4
    Cat Lady says:

    Also too, what’s going to happen with MERS? They’ve been deemed to not be owner of the note, therefore unable to foreclose, in some states but not others. Between the mortgagor’s inability to pay, their unwillingness to pay, and the inability to foreclose due to lack of standing, we really should have the banks where we want them. BofA had to cough up $8.5 billion to investors in their MBS pools, if all of us whose mortgages were assigned to MERS stopped paying, what could they do?

  5. 5
    WereBear says:

    My mother walked away from her underwater mortgage.

    There was literally nothing else she could do; the bank would not cooperate, the house was worth half of what she paid for it, much less what she’d wind up paying for it, and her retirement was lost to the Bush years. She was working 70 hours a week trying to keep up with the payments & insurance.

    She’s down to one job, an apartment, and so much less stress. We kids were raised to sell a kidney before we asked for help or went bankrupt.

    The greedy banksters are ruining that precept, too. If they are going to act like Mongols on the financial steppes, they are going to force us to do so in self-defense.

  6. 6
    General Stuck says:

    Just watched Inside Job a couple of nights ago, and they can all DIAF. Just about the entire financial and banking industry needs a stint in The Big House to get their minds right and their asses kicked for all the pain and grief they have, and are currently causing the human race. They are as much a pestilence on society, than anything else. And a special place in hell I hope awaits Randian jackass Allan Greenspan for his proactive efforts in causing the pain.

    And what’s worse is they seem to be plotting and scheming to go right back at it, soon as possible, which is now of course. And our worthless congress, will likely let them as soon as possible. Which is yesterday, of course. Citizens United has likely put the final nail in our collective American Coffin in the nearer future, handing the Galtians the ultimate for corruption hyperdrive.

    More than a few dems are in on the scam, but it is very much mostly republicans to blame. And their stupid failed conservative crackpot theories of personal greed wrapped up in a red white and blue “market freedom’ invisible hand job.

    Have a nice 4th everyone, and sharpen your pitchforks, if you have them.

  7. 7
    Villago Delenda Est says:

    Most of the Banksters need to die painful deaths. The perpetrators of the fraud-o-rama that is MERS, in particular, need to DIAF, after every asset they have, to include any trust funds set up for their spawn, has been confiscated.

    The Corelones demonstrated more honor than these maggots.

  8. 8
    IL JimP says:

    When I worked in financial services and people would come to me with these loans it pissed me off because most of the time there was no way out of them. There was no equity because usually they put down little or no down payment. Then they compounded it by making the smallest payment, which wasn’t even a full interest only payment. Most of the time I had to advise them to sell before they got into real trouble. Yes, they bought more than they could afford and should have known better; but the mortgage broker who sold them the loan is supposed to be the expert and if they say that you can afford it even though you don’t think so. Who are you going to believe yourself, the non-expert, or the mortgage broker who is the expert. A lot of people believed the mortgage broker and set themselves up for foreclosure the day they signed the papers for the loan.

  9. 9
    Constance says:

    Interesting. The two friends I have with BoA loans have both been foreclosed upon. #1 is already out and in a rental after 14 months of being systematically fucked with–do this, oh wait, that was wrong, do this and that, and by the way the form was the wrong one, etc., etc., etc. #2 is going to be moved in the next couple of weeks after two years of games.

    Both are hard workers and only lost their ability to make a decent living when the housing/real estate/mortgage industry crashed in our area. They may have been over-extended with the loans but I’m not willing to pry. I do know that they are both hard working people.

    I would love to sell my house (I cannot keep up with the upkeep on one and a half acres anymore)but the market here is for short sales (there are many available in Northern Nevada) and no one is interested in a house with a low but fair price. So I just have to wait for all the short sales and foreclosures to clear the market and then people will look at the other market. It’s so depressing to drive around my community and see the number of houses that have been walked away from. One, right down the street, even has the auto parked in the driveway.

    The suffering behind all those empty houses makes me angry and sad and frustrated. I no longer have any belief that there is a way to do anything about congress and bankers.

    Looking ahead 20 years I’m not seeing a good outcome.

  10. 10
    dmbeaster says:

    Cannot help but think that there is some oddball regulatory reason why it is in the banksters’ interest to renegotiate this class of loans, as opposed to some sort of rational thought process on how to deal with the mess. (For example, some aspect of the regulatory side of the deal when they bought out the sick lenders that originated this crap – the FDIC has been known to do that. One possibility would be that the write down on these would not trigger the same consequences, and that the FDIC agreed on that when it did the takeover deals with CHase and BofA – for example, these loans were booked in differently form the outset).

    If they allegedly had the ability to engage in that rational thought process to proactively deal with these bad loans, then you would think that the same thinking would extend beyond this class of loans. I personally do not think that the have the management savvy to make this kind of decision as to this class of loans, and wish I knew the back-story.

  11. 11
    opie jeanne says:

    We have two houses. The house we live in 90% of the time, in WA, has a mortgage that was purchased by BofA soon after we bought the house last fall. The interest rate is excellent, funded by a different bank, and it makes me wonder at the geniuses at BofA who refused to offer us this nice loan but then decided almost immediately to purchase it, which means it cost them more than if they had funded it in the first place.
    The other house is a tiny cabin in SoCal has a mortgage owned by Chase. It is a second house and up until recently had what I considered a decent interest rate for a second house four years ago: 6.5%/30 year fixed. In January Chase contacted us with an offer too good to pass up: they’d re-fi for free to a 5% 30-year fixed.
    We asked them why and they said it was because we pay our bills and they didn’t want us to refi with someone else, didn’t want to lose us as customers. We took the offer, all the time shaking our heads at the stupidity of this, especially in light of what we know is going on with people who need the help and most of whom would turn into customers like us if they got that help.

    @IL JimP
    We have never believed the banksters who told us that we could afford to do what we clearly could not, but we are contrarian like that.

    In SoCal, one mortgage group specifically targeted Hispanic renters by sending out reps to talk them into buying houses they couldn’t afford. That was one of the worst behaviors we personally witnessed, and we saw part of its aftermath when we sold my MIL’s house to a couple with a little boy. They were thrilled to finally have a place of their own and we were thrilled for them. Three years later they were gone and we realized that they were probably… what am I saying? that they WERE told they could afford something they could not. The double helping of evil in this is just staggering.

  12. 12
    Jennifer says:

    @ 6 General Stuck – but of course they’re already back at it…they geared up at the first of this year by manipulating the oil markets, which is why we’ve been paying a dollar more per gallon since January.

    Funny how the price has dropped off by $.50 – $.75 per gallon right in the middle here of “peak driving season” ain’t it? Or perhaps not…if I recollect rightly, that price started dropping in May, within a week or so of the Justice Department announcing that they were looking into price manipulation in the oil markets….

  13. 13
    General Stuck says:

    Jennifer

    This. And don’t get me started on the cesspool of greed and monopoly that is the oil industry.

  14. 14
    ABL says:

    Ugh, nightmare. I did foreclosure work for JPM as receiver of WaMu. Not permitted to say anything, but let’s just say it suuuuuuuuuucked. Drove me right to the edge and into a 6 week medical leave.

    ::shudder::

  15. 15
    Linnaeus says:

    In SoCal, one mortgage group specifically targeted Hispanic renters by sending out reps to talk them into buying houses they couldn’t afford. That was one of the worst behaviors we personally witnessed, and we saw part of its aftermath when we sold my MIL’s house to a couple with a little boy. They were thrilled to finally have a place of their own and we were thrilled for them. Three years later they were gone and we realized that they were probably… what am I saying? that they WERE told they could afford something they could not. The double helping of evil in this is just staggering.

    One of the most poignant scenes in Inside Job is with a Latina woman who explains what happened when she and her husband bought a new house: they were lied to by the mortgage broker and the payments they were charged ended up being significantly higher than the payments they thought they’d be making. The couple doesn’t speak English, either, which I suspect made them even more vulnerable to fraud. It’s absolutely criminal.

    Probably most folks here have seen Inside Job, but if you haven’t, do so. It doesn’t necessarily tell you things you didn’t already know, but it ties them all together into a pretty compelling and accessible narrative.

  16. 16
    kdaug says:

    What part of “cascading failure” do the banks not understand?

  17. 17
    Renie says:

    I have a Chase mortgage which has 5 years left on it. Like opie jeanne, Chase keeps sending me letters (even FedEx ones) telling me I can get a lower rate. But with 5 years left why would I want to get a new mortgage for the next 30 years! Even if they gave me a 15 year why would I want that? I’ve never missed a payment yet and am able to pay more towards the principal to speed it up. As others said, they should be helping those who need help, not me.

  18. 18

    if it hasn’t already, i bet the prospect of a government default will shake the shit out of the commodities and derivative motherfuckers who are, or have bet long.

  19. 19
    opie jeanne says:

    @Renie

    Yes, that’s insane. We’ve only owned the cabin for a little over 3 years so it made some sense to take the deal.

    In 2003 Countrywide bought our very nice mortgage from the very nice Ohio Savings Bank with a very nice interest rate of 5.5% 30-year fixed, and immediately offered to refinance it for us. They didn’t stop calling and mailing us offers until they went belly-up. I mean, they called us every week and mailed us something every day, and they couldn’t beat our interest rate. What they wanted us to do was to take out a larger mortgage, take the equity out of the place. We told them to take a hike. Then we watched neighbors take that bet and lose their houses.
    I only had one semester of Economics in college but I do know how to add and subtract, and I thought this looked like the worst sort of sucker bet. It was.

  20. 20
    MobiusKlein says:

    Why are negative amortization loans even legal?
    My first step as Financial Dictator is to outlaw those loans.

    If you want to owe more and more, you have to do it the old-fashioned way – skip your payments.

  21. 21
    Jennifer says:

    I had a Chase mortgage for several years, because they bought it from the original lender. I was not happy about it – first they bought the second mortgage, then a bit later bought the first mortgage (I did some of that creative re-financing after adding on to the house in 2003 – the second mortgage freed me from the mortgage insurance requirement). Those guys were assholes. I went through a tough stretch for a year or so around 2005 and so was sending in the payment by mid-month, before any late fee would be added and of course well before anything was reportable to the credit bureaus. In short, I was never “late” with a payment. But those assholes would be on the phone EVERY FUCKING MONTH by the 5th trying to harangue me about the payment. I took to telling them, “so, what are you gonna do? We both know you can’t MAKE me send it in any earlier, and you can’t report me to the credit bureau.” So then, they started to pretend they got the payment a day late. After they pulled that once, I said, “I’m not paying you a late charge because you sat on the payment instead of posting it when you got it.” So then, I started sending it priority with delivery confirmation. They tried the “we got it late” thing again – I faxed a copy of the delivery confirmation showing it in their possession 2 days before they could charge the late fee. The last time they tried the calling to dun me routine, I pulled up the delivery confirmation online and told the guy, “well, according to USPS, you’ve had the payment since yesterday. Does Chase just like to waste money hiring people to make calls on bills that aren’t late?” That was the last call I ever got from them.

    When the rates dropped way low in late 2008/early 2009, I refinanced just to get away from the SOBs, and fortunately, they seem to not be on the mortgage-buying spree anymore, because they’ve not bought it back.

    But this is one of the frustrations in all this – if you have a mortgage, you have no control over who you may ultimately end up in business with. I never approached Chase for funding the mortgage in the first place for the simple reason that I didn’t want to be in business with them. But they don’t ask, and you end up with whoever you end up with.

  22. 22
    Nutella says:

    Another anecdatum:

    During the bubble, a young couple I know bought their first condo. They are very conservative in their spending habits and so asked for a conventional 30-year fixed-rate mortgage. They were pressured by the mortgage provider to take all sorts of wild and crazy mortgage structures that they knew would be trouble. They had to be extremely insistent to get the bank to sell them the conventional mortgage they wanted.

    Not many people are strong enough and informed enough to resist that kind of pressure. Pressure that everyone who has been awake for the last 10 years knows came from the banks, not from

    FDR, LBJ, Malcolm X, the Big Dog, and Howard Dean.

  23. 23
    KG says:

    The brokers were suppose to be fiduciaries (California law, but likely the same elsewhere); but they were mostly con men who thought they were working for the banks. The greatest liability in this mess was with the brokers, who either didn’t carry E&O insurance, had their carrier tell them to fuck off after the first claim was filed, or just disappeared. I’ve litigated enough of these cases to know that to be fact.

    As for the banks, once you sign the documents, you’re not a customer, you’re an asset. I’m sure they knew they were making loans that people couldn’t afford and didn’t care. Real estate always goes up, caveat emptor, and all that jazz. Loan modifications were, and I figure these are as well, nothing more than PR stunts. They never had any intention of actually helping anyone get out of a bad loan, they just wanted to make it look like they could. They are slightly more interested in short sales, if only because it means that they don’t have another REO that fucks up their liquidity balance. But even short sales have been an issue lately

  24. 24

    @nutella

    as a result of the divorce decree, i had some equities from before we were married, that grew substantially in the 90s, that i couldn’t touch until early 2001.

    long story short, i was buying with 50% down, and wanted a 15 year fixed. the real estate agents were worse about that than the lenders.

    in the end it worked out, but had i not been bound and determined to pay as little interest as possible, i could have been stuck with a bad mortgage, and lost the value of my investments.

    the worst of the real estate agents kept insisting that i would want a house with lots of space in a better school district, and that she could get me approved. i only wish i could have been ruder to her.

  25. 25
    The Raven says:

    BTW, there’s a Citi mortgage ad on the left on my system, showing a healthy older guy with a beautiful woman who is not over 40.

    Not quite sure how this is supposed to reach corvids.

    Croak!

  26. 26

    They’re modifying the loans of people they see as doing well enough to consider strategic default. Duh.

  27. 27
    El Cid says:

    Principal reduction was absolutely impossible and the suggestion of irresponsible hippies infatuated with their fantasies of the New Deal. As we see here, of course.

  28. 28
    Ruckus says:

    You have to figure that if the banks are doing this they have some sort of ulterior motive. They always do so why should this be any different.
    1. They figure they can make more money this way.
    2. It’s a PR stunt that likely will cost them little.
    3. As someone up thread stated they are being forced into it.
    4. They really don’t want assets, they want money. Without doing this they will likely have less money and more (overvalued) assets.
    5. They won’t do this to already defaulted loans for one reason. Precedence. They really don’t want people to think they can just walk away or default and come out OK. The cat may be out of the bag on that but that doesn’t mean they won’t still try.

  29. 29
    ppcli says:

    Bank of America and Chase inherited [interesting choice of word, there, don’t you think?—ed.] their portfolios of option ARMs when they bought troubled lenders during the housing crash.

    Yes. In the sense that the Menendez brothers inherited their parents’ wealth.

  30. 30
    Mnemosyne says:

    @ Ruckus

    6. The banks have figured out that the housing market ain’t coming back anytime soon, so sitting on a bunch of foreclosed houses hoping that suckers will come along and pay inflated prices for them isn’t going to get them back into the black.

    7. State lawsuits are making them nervous, including the ones involving upkeep of the aforementioned foreclosed houses, and they’re hoping to forestall them by claiming they’ve already taken care of the problem.

  31. 31
    jonas says:

    Can someone familiar with mortgage investments answer the following: does a modification with principal reduction technically qualify as a default in terms of 1. the homeowner’s credit rating and 2. any default swaps owing on whatever investment vehicle said mortgage is bundled with. It could be that the banks are fiddling with all sorts of variables — interest rate, terms, amortizations, etc. — to avoid triggering a “default” that would render the MBS worthless.

    This also appears to be the problem with the Greece bailout: asking banks to roll over maturing debt may actually trigger a “default” even though it’s a voluntary agreement.

  32. 32
    ppcli says:

    @MöbiusKlein:

    My first step as Financial Dictator is to outlaw those loans.

    Oh sure. Like people will make a nonorientable surface Financial Dictator.

  33. 33
    Groucho48 says:

    Oh sure. Like people will make a nonorientable surface Financial Dictator.

    hehe. Funniest comment of the day.

  34. 34
    Corner Stone says:

    Had Chase mortgage when they bought my loan shortly after the purchase. They were a freakin’ nightmare to deal with during the aftermath of Hurricane Ike. Kept my insurance money, played Three Stooges with me for weeks even after I threatened litigation. I ran out of liquid cash to pay my contractor and got super lucky he took me at my word to continue repairs while I waited for Chase to release the insurance check(s). That eventually worked out, mucho dinero later.
    Re-fi’d with Amegy Mortgage in the beginning of 2010, thank the sweet and merciful FSM.

  35. 35
    debbie says:

    @ General Stuck:

    And don’t get me started on the cesspool of greed and monopoly that is the oil industry.

    Did you see the tv ad from the American Petroleum Institute? Head shots of “ordinary” people, all coming out against cutting oil subsidies. Too risky to the economy and jobs creation. The last shot was a guy saying something like, “This is not the time to raise prices.” I could picture the director calling out “Cut,” and then turning to someone and snickering, “Unless it’s us!”

  36. 36
    General Stuck says:

    debbie

    Haven’t seen that, but doesn’t surprise me. The oil company subsidies the cherry on top is the perfect symbol of what is wrong with this country. And world

  37. 37
    stickler says:

    Jennifer, and everybody else:

    But this is one of the frustrations in all this – if you have a mortgage, you have no control over who you may ultimately end up in business with.

    No, no, no, a thousand times NO. Get your damned money out of the damned MegaBank and into a CREDIT UNION. Not impossible that they’ll sell the note to VampireSquidBanc, but it’s damned unlikely.

    If you have access to a credit union, and most of us do, then get your collective asses down to the closest branch TOMORROW and refinance. Nobody with an IQ above room temperature should be doing business with Chase or Bank of America. (Any kind of business: cut up your rewards credit cards and department store cards that are with the MonsterBancCorps, too.)

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