Some relief may be in sight for troubled US mortgages
As more than 5 million Americans fall behind on mortgages, banks signal a new willingness to reduce the principal.
Some homeowners who are having trouble paying the mortgage may be getting genuine relief.Skip to next paragraph
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An increasing number of lenders are now willing to do what they have long been reluctant to do: reduce the principal of a troubled loan. That shift is in part a recognition that home values have dropped sharply, foreclosure rates are soaring, and the political climate in Washington has shifted.
Advocates for borrowers hope the new modifications work better than prior efforts, which were not that generous: A government report found homeowners who modified their loans defaulted a second time at a very high rate last year.
The change in some lenders’ willingness to forgive and forget won’t come a moment too soon: Some 5 million to 6 million homeowners are now either behind on their mortgages or facing foreclosure. And over the next 12 months, the interest rates on $1 trillion in adjustable rate mortgages will be resetting at a time when the nation’s unemployment rate is climbing – factors expected to put more homeowners under financial stress.
The economy is now at a point where people can expect to see more restructuring of mortgages, says Alan White, a professor at the Valparaiso School of Law in Indiana. “It’s not too late to change course, and there are some indications we might be changing course.”
For example, last week, Federal Reserve Chairman Ben Bernanke wrote Rep. Barney Frank, chair of the House Financial Services Committee, to inform him the nation’s central bank has a new policy to avoid preventable foreclosures on the $47 billion in residential mortgages taken over from troubled financial institutions.
“This is important because the government will control more and more of these assets,” says Mr. White.
On Jan. 26, Wells Fargo, which purchased Wachovia Bank, said it would try to work with 478,000 Wachovia customers to avoid preventable foreclosures. In addition to term extensions and interest-rate reductions, “In geographies with substantial property value declines, we will even use permanent principal reductions,” said Mike Heid, copresident of Wells Fargo Home Mortgage in a statement last week.
And recently, Citibank broke with other lenders in supporting legislation that will allow a bankruptcy judge to modify the principal on a mortgage. The legislation was voted out of a House committee last week.
The banks are also under increasing political pressure. Treasury Secretary Tim Geithner will soon announce a new strategy for reviving the financial system, President Obama said in his radio address Saturday. The administration has already said it will devote between $50 billion and $100 billion of the remaining bank bailout funds towards preventing foreclosures.
The new willingness by some lenders comes at a time when new data indicate that, unless a bank is more generous with negotiations, a sizable number of borrowers will default again. In December, the Office of the Comptroller of the Currency issued a report that found, in the first quarter of last year, 25 percent of modified loans redefaulted in one month and 58 percent redefaulted in eight months.
At a national forum for housing in December, John Dugan, the Comptroller of the Currency, asked why the number of re-defaults was so high. “Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit-card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?”