A large proportion of people seeking bankruptcy or asset protection advice are homeowners facing mortgage foreclosure. Up to now, most of my clients report that their mortgage lender and mortgage service company were reluctant to modify mortgage terms and payments although an increasing number of mortgage lenders had eased procedures for short-sale approval.This past Saturday’s Wall Street Journal had two articles about mortgage lenders’ new programs to help homeowners avoid foreclosure by mutual modification of mortgage terms. Examined closely, these new programs, while welcome, apply to a limited segment of homeowners with problem mortgages and upside down houses.
J.P. Morgan Chase is the first bank to make an ambitious effort to modify their clients’ problem mortgages. J.P. Morgan took over the assets and liabilities of Washington Mutual which was one of the country’s primary subprime lenders. The bank is considering modification of up to $70 billion of mortgage debt owed by up to 400,000 homeowners. The details reported by the Wall Street Journal suggest that J.P. Morgan’s new program addresses a limited group of borrowers. The bank apparently is targeting primarily homeowners with so-called option adjustable rate mortgages which loans permit borrowers to make minimal payments that don’t even cover the interest. If only minimal payments are made the mortgage principal balance can increase each month by the amount of accrued interest. In the case of the increasing principal balance and a decreasing property value the mortgage lender’s loss exposure may increase month to month; this is not good for either the borrower or lender. The Journal said that J.P. Morgan will try to switch these homeowners to fixed rate loans with payments the families can afford.
The other mortgage modification plan reported in the Wall Street Journal is the government’s FDIC program directed to borrowers from the defunct lender IndyMac which the government had taken over. The FDIC now administers these mortgages through a new entity called IndyMac Federal Bank. After examining its borrowers’ tax returns the new program would modify the terms and balance of the mortgage so that the homeowner pays no more than 38% of his current income toward the mortgage, real estate taxes and insurance. The program has limits.
The FDIC is considering modification of IndyMac mortgages only when the borrower occupies the property; investors and speculators are not eligible. It is likely that no private bank or federal mortgage relief program will help investors. The government’s stated policy is to keep people in their homes and not bail out private real estate investors. Another limitation applicable to the FDIC program, the Journal reports, is that the FDIC will not rework a loan if it thinks it can make more money by foreclosing and selling the property.