Saturday, November 1, 2008

Reducing Foreclosure Rates

It is wonderful to see a business look at the long-term stability rather than just to the next quarterly report. And when the long-term stability of a company is intertwined with their customer's stability it is even better. Few business decisions have as huge of an impact as keeping people in their homes, and reducing foreclosures, as load modifications do. Especially when the loan modification is in the best interest of all the parties involved.

This brings us to an article in the Wall Street Journal titled Massive Effort to Save Mortgages. It is about a loan modification program that JP Morgan is implementing to reduce foreclosure levels. Lets take a look -

J.P. Morgan Chase & Co. launched an ambitious plan Friday to modify the terms of $70 billion in mortgages for borrowers who are behind on their payments or soon could be.

The move by the New York bank will cover as many as 400,000 borrowers. They'll be moved into loans carrying lower interest rates, smaller principal amounts or other more-affordable terms.

The move also suggests that banks are realizing they can improve the value of their loan portfolios through mass modifications rather than foreclosures, which tend to produce larger losses. Until now, mortgage holders have been reluctant to renegotiate loans or have been doing so one-by-one, a time-consuming process. The bundling of loans into securities that are then sold to investors further complicates matters.

J.P. Morgan's push is especially aimed at so-called option adjustable-rate mortgages, or options ARMs. These allow borrowers to make a minimum payment that may not even cover the interest due -- resulting in a higher loan balance.

Under the plan, option ARMs that are accumulating interest will be replaced with fixed-rate loans that are more stable for borrowers and seen as far less likely to default. J.P. Morgan said it wouldn't begin the foreclosure process on borrowers during the next 90 days, as it opens loan-counseling centers and takes other steps to launch the program.

This is a very good business decisions. These Option ARMs are toxic. Once the recasts start there would be a massive wave of foreclosures. While it is letting people stay in homes they could never afford. Many people may not be able to even be able to make a fixed rate mortgage payment at the new, lower value. However it will definitely slow the bleed, and possibly long enough for prices to stabilize.

Another interesting morsel in the article is the following -

Nationwide, 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, about triple the usual rate, according to Moody's, a research firm. Some 4.3 million of those are expected to lose their homes.
As we note over and over, things will get worse before they get better.

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