Some stories over the weekend collectively add up to a counter-offensive about both government and private industry’s impotence in the face of the foreclosure crisis. They beckon reconsideration, showing the humanity of the corporate behemoth and the compassion of the public welfare state.
First you have this story about banks quietly reducing principal on some underwater loans, for people at risk of slipping into default. See, they’re so on top of it that they are giving people a break before they even reach delinquency!
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.
Ms. Giosmas, who lives in Miami, was not in default on her $300,000 loan. She did not understand why she would receive this gift — although she wasted no time in taking it.
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.
Getting out from under option ARMs before they recast is probably a smart business decision. A good portion of borrowers started defaulting, due to unemployment or other hardships, before the option ARM recast, and interest rates plunged during the crisis, making the recasts less severe. So the long-feared apocalypse on that front was consumed by other events. But enough of it occurred to know it would be a difficulty, and tacking it on to the current state of affairs would be quite dangerous.
That said, there are millions of borrowers who have had no help and even abuse from their bank once they hit delinquency. They actually could use a reduction in principal, but only this special class of underwater option ARMs are getting any help. “Loan modifications that should be happening aren’t, while loan modifications that shouldn’t be happening are,” as Adam Levitin of Georgetown says in the article.
But never fear for them, because the government is ready with a billion-dollar program! A billion dollars!