April 13, 2010
The idea of reducing loan principals last month became a centerpiece of the administration’s efforts to help seven million households threatened with foreclosure. But an official at one of the banks, David Lowman of JPMorgan Chase, said principal reduction could reward households for consuming more than they could afford, might punish future homeowners by raising the cost of borrowing and in any case was simply unworkable.
“We are concerned about large-scale broad-based principal reduction programs,” Mr. Lowman, the bank’s chief executive for home lending, testified during a hearing of the House Financial Services committee.
Mr. Lowman’s comments were briefly echoed in more restrained form by an executive from Wells Fargo. “Principal forgiveness is not an across-the-board solution,” said the executive, Mike Heid, co-president of Wells Fargo Home Mortgage. Two other bankers who testified, from Bank of America andCitigroup, largely avoided the issue.
A Treasury Department spokeswoman declined to comment on the hearing.
The government modification program has been under attack by lawmakers and community groups for doing too little too slowly. The Congressional Oversight Panel is issuing a report Wednesday that says, “Treasury’s response continues to lag well behind the pace of the crisis.”
In response, the Treasury Department said that its latest modification report, also to be released Wednesday, showed that the number of permanent modifications grew in March to 230,000 households, an increase of 35 percent from the previous month. The Treasury also stressed it was still introducing programs, including those aimed at reducing mortgage principal.
The testimony on Tuesday, however, offered the first public acknowledgment that these latest foreclosure prevention measures might encounter some resistance among banks, ultimately rendering them less effective than hoped.
One of the new government programs will require lenders to strongly consider reducing the mortgage balance for distressed borrowers who qualify for the government’s modification plan.
A more radical plan urges lenders to refinance loans for borrowers who may be solvent but who owe much more on their homes than they are worth. Many of these loans have been securitized into investment pools but are serviced by the big banks.
The investment pool would get the mortgage off its books for the current market value of the property — less than it is owed, perhaps, but more than it would receive if the house went into foreclosure. The borrower would receive a new government-insured loan at market value, presumably making him less likely to walk away.
It is this last program that seemed to irk JPMorgan Chase.
“If we rewrite the mortgage contract retroactively to restore equity to any mortgage borrower because the value of his or her home declined, what responsible lender will take the equity risk of financing mortgages in the future?” Mr. Lowman asked in his prepared comments.
In any case, he said, Chase cannot rewrite most of these deals. The bank’s contractual arrangements with the investors do not allow for principal reduction.
Furthermore, Mr. Lowman argued, the cost of reducing principal will be built into future loans, resulting in less access to credit and higher costs for consumers.
What Chase — one of the strongest of the big banks — might be really worried about is not the primary mortgages it services but the $133 billion in home equity loansand lines of credit it carries on its own books.
The question of what happens to these secondary loans in a mortgage modification was at the heart of the Congressional hearing on Tuesday.
Investors who own the primary loans argue that the others should be second in line, getting only the money that is left over after they have been satisfied. But banks like Chase, which own the majority of second loans, want a better deal. Since they have the power to disrupt any modification, the result so far has been a standoff.
Alan M. White, an assistant professor at Valparaiso University School of Law who has closely studied the various modification plans, said, “Chase and Wells are attacking a straw man. Nobody is arguing for across-the-board principal reduction. But I think that they feel a need to push back hard on any attempts to get them to write down the troubled second mortgages and home equity lines of credit in their portfolios.”
Mr. Lowman emphasized the moral side of the issue. Mandating write-downs in home equity loans would be a particularly bad idea, he said, because these loans were simply used to consume rather than pay for housing.