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“It’s a huge problem,” said the economist Sam Khater. “Reducing negative equity would spark a housing recovery.”

Big Banks Easing Terms on Loans Deemed as Risks

EDITOR’S COMMENT: The banks know they have little chance of winning this battle when the end of the day is reached. And they know that even if they win, the value of the home is far less than what homeowners might be willing to accept as mortgage.

The name of the game here, the holy grail for the banks, is getting a new signature from borrowers because without that they have nothing — no mortgage, no note no obligation, no default, no foreclosure — even on the foreclosures that have already booked as completed. The deeds issued at auction are worthless wild deeds that fall far outside of the chain of title.

Unless the megabanks get the borrowers’ signatures on new documentation, the “assets” on the banks’ balance sheets completely unravel to a value of near zero. The consequence of this is the break-up of each of these monstrous too-big-to-fail banks.


As millions of Americans struggle in foreclosure with little hope of relief, big banks are going to borrowers who are not even in default and cutting their debt or easing the mortgage terms, sometimes with no questions asked.

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.

Before Chase shaved $150,000 off her mortgage, Ms. Giosmas owed much more on her place than it was worth. It was a fate she shared with a quarter of all homeowners with mortgages across the nation. Being underwater, as it is called, can prevent these owners from moving and taking new jobs, and places the households at greater risk of foreclosure.

“It’s a huge problem,” said the economist Sam Khater. “Reducing negative equity would spark a housing recovery.”

While many homeowners desperately need help to keep their homes and cannot get it, the borrowers getting unsolicited relief from Chase sometimes suspect a trick. Cutting loan balances, even for loans in default, is supposedly so rare that Federal Reserve economists wrote in a paper in March that “we could find no evidence that any lender was actually reducing principal” on mortgages.

“I used to say every day, ‘Why doesn’t anyone get rewarded for doing the right thing and paying their bills on time?’ ” said Ms. Giosmas, who is an acupuncturist and real estate investor. “And I got rewarded.”

Option ARM loans like Ms. Giosmas’s gave borrowers the option of skipping the principal payment and some of the interest payment for an introductory period of several years. The unpaid balances would be added to the body of the loan.

Bank of America and Chase inherited their portfolios of option ARMs when they bought troubled lenders during the housing crash.

Chase, which declined to comment on its program, got $50 billion in option ARM loans when it bought Washington Mutual in 2008. The lender, which said last fall that it had dealt with 22,000 option ARM loans with an unpaid principal balance of $8 billion, still has $33 billion of them in its portfolio.

Bank of America acquired a portfolio of 550,000 option ARMs from its purchase of Countrywide Financial in 2008. The lender said more than 200,000 had been converted to more stable mortgages.

Dan B. Frahm, a spokesman for Bank of America, said it was using every technique short of principal reduction to remake its loans, including waiving prepayment penalties, refinancing, lowering the interest rate, postponing some of the balance and extending the term.

“By proactively contacting pay option ARM customers and discussing other products with better options for long-term, affordable payments, we hope to prevent customers from reaching a point where they struggle to make their payments,” Mr. Frahm said.

Chase, Bank of America and the other big lenders are negotiating with the Obama administration and the nation’s attorneys general over foreclosures. Debt forgiveness and the moral hazard question of who deserves to be helped are among the most contentious issues.

The banks say cutting mortgage balances would be unfair to borrowers who remain current as well as impractical because so many loans are securitized into pools owned by investors. Bank of America’s chief executive, Brian T. Moynihan, told the attorneys general in April that cutting principal for current borrowers would send the wrong message to all those who have struggled to pay their bills. His counterpart at Chase, Jamie Dimon, bluntly said it was “off the table.”

Having an option ARM loan, however, apparently qualifies the borrower for special help. The loans, with their low initial payments and “teaser” interest rates, were immediately popular with buyers who could not afford or did not want to pay the soaring prices on houses. The problem was, eventually the rate would reset or the loan balance would have to be paid in full. “Nightmare Mortgages” they were called in a 2006 BusinessWeek cover piece.

Option ARMs were never quite as bad as predicted, partly because the crisis pushed down interest rates so far that the resets were relatively mild. Many owners did default on them, but others, like Ms. Giosmas, were quite happy to pay less for years than they would have under a conventional loan. She used option ARMs on her investment properties too.

“They saved me,” she said. “Why would I want to pay a lot more every month? I’d rather have it in my pocket.”

The concern the banks are showing for those who might get in trouble contrasts sharply with their efforts toward those already foreclosed. Bank of America and Chase were penalized last month by regulators for doing a poor job modifying mortgages in default.

Adam J. Levitin, a Georgetown University law professor, said these little-publicized programs were more evidence that the banks were behaving in contradictory and often maddening ways.

Loan modifications that should be happening aren’t, while loan modifications that shouldn’t be happening are,” he said. “Homeowners of any sort, whether current or in default, would rightly be confused and angry by this.”

The homeowners getting new loans, however, are quite pleased. In effect, the banks are paying the debt these owners accrued as the housing market plunged.

Ms. Giosmas bought her two-bedroom, two-bath apartment north of downtown Miami for $359,000 in early 2006, according to real estate records. She made a large down payment, but because each month she paid less than was necessary to pay off the loan, her debt swelled to about $300,000.

Meanwhile, the value of the apartment nosedived. By the time Ms. Giosmas got the letter from Chase, the condominium was worth less than half what she paid. “I would not have defaulted,” she said. “But they don’t know that.”

The letter, which Ms. Giosmas remembers as brief and “totally vague,” said Chase was cutting her principal by $150,000 while raising her interest rate to about 5 percent. Her payments would stay roughly the same.

A few months ago, Ms. Giosmas sold the place for $170,000, making a small profit. Having a loan that her lender considered toxic, she said, “turned out to be a blessing in disguise.”

9 Responses

  1. @ Nora

    “I have first hand knowledge that banks are offering borrowers either lower interest rate with some small reduction in principle balance, and or a large reduction in principle balance and depending on the interest rate it may go up or down slightly”

    This is a wide range here——–interest rates are dirt cheap, no gift there. Small reductions in principal will not let a person move tpo a new job location. The second set you mention is more appealing to most Im sure, but how much is substantial in % terms. A bank’s view of a substantial reduction is different from a borrower’s I suspect. I wish this were real-I hope its real-is it under pressure from a mediator?

    Im afraid as bruised as most of us are, that it will take a little more detail about who, how much, and where, before this is credible——-I certainly have not seen it. If I did Id be 1st to sing their praises but frankly as I see the same people destroying the entire nations of Greece, Ireland, Portugal, Spain, and Italy, Im having some trouble swallowing it.

  2. I have first hand knowledge that banks are offering borrowers either lower interest rate with some small reduction in principle balance, and or a large reduction in principle balance and depending on the interest rate it may go up or down slightly. My opinion is the banks are finding different ways to repair some of the damage. If they feel that a borrower has a good case against them and the banks need to make corrections why not offer a mod. and get a new signature and that may help one or both parties. It would not matter at this point if the borrower is behind on payments or current, what matters is that the old mortgage is done with and new papers are filed with a new agreement and the borrower may not take action agains the bank.

  3. @db – “Charlene” posted an article at sourceoftitle wherein a homeowner actually went to jail for just such a liar loan. A bored IRS agent went after him and I am so not kidding. Your statement that the criminal is walking around with dough in his pockets as a respected community member was certainly not lost on me. The brokers are charged with knowledge – they should get the cuffs first.

  4. And then again maybe the sceptics are correct and they just wanted her autograph on something, anything. But, as to the note, I just don’t see the value of someone with no interest in the note getting an autograph on a new piece of paper. “Unless” that someone really does have the interest in the note…….

    And I agree the story is some kind of spin.

  5. This is how the HAMP funds should have been administered, or something akin to this. If the banksters are doing it seamlessly, than so could have some agency not devoted to homeowners’ failure. Note the hoops Ms
    Giosmas didn’t have to jump through.

    What are the ramifications to the note owners, tho, or at least the people who were entitled to the payments streams on the higher debt? These banksters must be subsidizing those streams or maybe those recent suits settled those issues. I don’t know – over my head and out of my research range. In the final analysis, is this a better bet for BofA and JPM – to lower the payments and principal to keep the loan on someone’s , got me whose, asset column at the cost of subsidization ? Wonder how this is getting treated tax wise by B of A and JPM. Are they actually using HAMP funds? If so, that should ease the pain, no? But as to the claim of 10’s of thousands – Nah!

    Still, if the jubilant Ms Giosmas didn’t get her old note back and get a new one, she is not modified. She, too, is subsidized. Not all bad as long as the subsidy continues. In fact, great. Which leads me back to the old theory that the investors don’t own the notes – only bought rights to the payment stream. No one owns the notes! That is so weird. What’s that mean – the note is bifurcated? One party owns the piece of paper with no interest in the debt, or it does, but another owes the rights to payments it evidences?
    That’d play hell with the UCC. The last seller of the note didn’t sell the note and sitll owns it minus the payment stream obligation sold to the investors? Maybe the notes are cdo’s and the seller guaranteed payment or re-payment or whatever that would be at the rate of the payment stream. Maybe I’ve had too much caffeine. Be kind – I’m just throwing out theories here and have long ago owned my ignorance on that stuff.

  6. I agree with Neil , your case rest always on the Judge “getting it “so keep it simple and give just them the facts . Hope for the best , object to everything , sign nothing until your know it is a deal you can live with . More and more Judges are getting it. However until there is policy of principal reduction that is across the board with all mortgages this madness will never be over. Not like this PR MOVE BY THE BANKS .Most folks don’t even fight they walk , it’s the 5% that stays & fights to the end that might change everything for us all. Never give up , be proactive .

  7. “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***.”




    They are trying this with a friend of mine…what should they do? If you go for it, then I guess you won’t have to worry about having fight in court before a judge who may or may not “get it”…I guess it depends on how much “fire” you have in your belly…?

  8. This was front page yesterday——-this “lucky” person is a speculator with multiple homes. Furthermore as I read the article, There is no verification by the bank –in fact the CEO quotes say they will not touch principal. There are no details, was she a large depositor?

    One front gage story is PR ——why is it that I find it hard to believe?

    Maybe—-the loan was a completely uncollectible fraud?

    Did the bank actually have the note-is she going to get a knock on the door in a couple years demanding the payment on the note—which I doubt was turned over to her–and limits on claims in excess of value would not apply to investment property.

    There is a lot more to this story than meets the eye-the reporter should do the homework on this one-isolated case–how many similar and why?

    The story in another post about a modifier POC asking the applicant to make misleading statements about income is more in line with my experience. That happened to me on the front end. The broker on behalf of old AHMSI in 2004 asked me to recharacterize my wife’s position as an employee for 10 years rather than the contractor status she had been recently relegated to. I refused-I stated, “if anything goes wrong with this in the future, the lender will assert that I defrauded them into issuing the loan.” It did fail—–they would certainly have made that defense and I would be answering questions for the FBI now as if I were the crook rather than the broker——-who retired with a small fortune and is a respected member of the community after effectively defrauding both homeowners and investors—–this is the way I have learned these people operate-not giving away principal reductions -with or without requests.

    People-no matter what they say to you recorded or not——–do not put youself at risk.

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