Wall Street and Washington come together to help troubled mortgage borrowers. Too late?
Fifteen months into the worst credit crisis in decades, major banks and the federal government are coming together on a solution for struggling mortgage borrowers.
The goal is to hasten the process for renegotiating hundreds of thousands of delinquent loans, either those held by major banks or held by Fannie Mae and Freddie Mac , the mortgage finance giants that faltered and were taken over by the government this summer.
Renegotiating loans for struggling homeowners has taken on more urgency as jobless claims rise and the economy declines. Housing prices continue to fall, leaving many with mortgages greater than the value of their homes, and banks continue to suffer major credit losses as a result.
Citigroup , JPMorgan Chase and Bank of America have separately announced plans to help ailing borrowers. On Tuesday, the Federal Housing Finance Agency, the regulator for Fannie and Freddie, announced its own sweeping plan.
The agency is targeting delinquent borrowers who haven’t filed for bankruptcy. The goal is to modify mortgages for borrowers who can support payments but make sure those payments don’t make up more than 38% of income.
James Lockhart, head of the agency, urged U.S. mortgage servicing firms–companies that process payments of loans rather than owning them outright–to adopt the plan as a national standard.
For the government, halting the steady slide in housing prices is the holy grail of all of its big plans to prop up the ailing banking system. It is throwing trillions of dollars at shoring-up banks caught in the housing mess, but nothing has, so far, put a floor under the plunging housing prices at the heart of the credit crisis. Going at the problem from the perspective of a borrower is yet another way to achieve that end.
The government studied the Federal Deposit Insurance Corp.’s approach to modifying loans of failed IndyMac Bank and used that as the model for this broader program.
Neel Kashkari, the Assistant Treasury Secretary in charge of the department’s $700 billion Troubled Asset Relief Program, said the plan will take pressure off mortgage servicing companies, “helping ensure that borrowers do not fall through the cracks because servicers aren’t able to get to them.”
Earlier on Tuesday, Citigroup announced its loan modification plan. The bank is stopping foreclosures for borrowers who live in their own homes and have enough income to stand a chance at repaying a renegotiated loan. It will also expand the program to include mortgages for which the bank collects payments but does not own.
Over the next six months, Citi will contact 500,000 borrowers who are not currently delinquent but close to falling behind to see if those loans could be modified.
Two weeks ago, JPMorgan said it would expand its mortgage modification program to an estimated $70 billion in loans, representing 400,000 borrowers. That is on top of the $40 billion in mortgages JPMorgan has rewritten since early 2007.
Bank of America will begin next month modifying 400,000 loans held by Countrywide Financial, the troubled lender it acquired this year. The plan, which starts Dec. 1, is part of an $8.4 billion legal settlement with 11 states.
Loan modifications have been complicated by the way the banking industry has approached mortgage lending in recent years, selling their loans off to other banks that bundle and resell them as securities rather than holding all loans separately.
For the banks, modification plans are self-preservation. Virtually no bank has been left untouched by the credit crisis, and Citi, JPMorgan, Bank of America and others will undoubtedly have rising credit costs for the next few quarters. Any plan to blunt those costs would be welcomed.
Well I don’t really have a lot of faith in these guys. They are in great part the cause. These very banks are the ones that had to get bailouts and now they are going to fix it are they?
Trusting them is a lot like letting the fox guard the chickens coup.