* Arguments over loan reduction entitlement continue
* Are second liens a factor, or not?
* Little consistency in policy between banks
While bickering continues between banks and the masters of Obama’s HAMP, the question still remains as to exactly who deserves a mortgage principal reduction in the first place.
The answer to this politically loaded question, which combines business sense and social responsibility into an explosive mix, could break the fortunes of millions of Americans on the edge of financial disaster.
At a recent hearing most banks opposed the idea of principal reductions, and all rejected the principal of a blanket approach. A further issue raised was second liens held by third party banks – reducing a first mortgage could be pointless is foreclosure on a second bond brought bankruptcy anyway.
This could all change if first liens were foreclosed and second ones collapsed accordingly. The talk on Wall Street is that alarm bells are starting to ring as big banks prepare themselves.
Each bank has its own set of policies regarding debt forgiveness, as the following examples show:
JPMorgan Chase regards three categories of borrowers as potentially eligible:
- Borrowers with low monthly payments for whom a small reduction in real terms could be of significant benefit
- Compliant borrowers whose requirements fit the FHA’s loan-to-debt or debt-to-income ratios
- Delinquent borrowers who qualify for FHA loans but need reduction or complete forgiveness of their second liens
Wells Fargo has been more compliant with Obama’s pleas. They can afford to because almost 91% of the customers are compliant too, with another 3% just behind. They allowed 50,000 capital reductions during 2009, with 15% average reductions, and an average 25% drop in payments. Wells Fargo considers forgiveness in terms of the following scenarios:
- Owner occupied homes in areas with severe price drops that show little hope of returning to full value
- Borrowers suffering financial hardship, but who are still able to prove their ability to service lower capital amounts.
- Home owners who want to remain in their own homes
CitiMortgage refuses to reveal how many loan modifications have been approved, or the amount involved, beyond remarking that the option must be “used responsibly” and that other alternatives existed. While giving no further clues to strategy, the bank has recently claimed to have assisted 825,000 customers since 2007.
Bank of America, which claims that 86% of their customers are paying on time, has received credit from the House Committee for their new “earned principal reduction program”. They are also calling for mortgages to be stretched out to 40 years, which will reduce payments without directly affecting bank equity.
These varying styles indicate that banks have a long way to go to achieve a common strategy, let alone agreement with Obama. Read more tomorrow at www.foreclosuredatabank.com.
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