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.
The newly launched $1 billion Emergency Homeowners’ Loan Program, or EHLP, is targeting homeowners who are among the most difficult to help: those who fell behind on their payments because of job loss or unexpected medical bills. For many of them, it might be the last chance to save their homes.
If she is approved, the government will subsidize Allwine’s mortgage payments for a maximum of $50,000 over two years. After that, the interest-free loan will be forgiven over five years if she stays in her home and stays current on her payments.
EHLP is the latest government program targeting the nearly 1.8 million homeowners like Allwine facing foreclosure. It is going to have to move fast: The program was supposed to start last year, but implementation delays mean that the Department of Housing and Urban Development must spend all its $1 billion by the end of the federal government’s fiscal year, Sept. 30.
“One billion dollars” is the new “one million dollars” from Dr. Evil. If you divide it by 1.8 million homeowners like the woman profiled here, you get less than $600 per homeowners. Meaning that this program won’t really stretch. It will be extremely helpful to those who actually can access it, but that won’t be a large number. Meanwhile, there is $44 billion in unspent HAMP money on the sidelines because the program is so poorly designed that the banks aren’t using it to modify loans. It’s certainly better that HUD is in control of this money, but it’s not nearly enough to satisfy the need.
Guardian angel loan modifications for underwater ARMs and the ELHP program are just great, then, but will alleviate a smidgen of the massive crisis and are designed more to generate headlines than anything. And judging from the papers this weekend, they were successful.