JPMorgan Chase vs. Mortgage Modifications

In a recent blog entry, I shared my own little rant on the subject of mortgage modifications — one of many proposals to help rescue distressed homeowners whose mortgage payments are crippling their finances. I’m apparently not alone — it turns out JPMorgan Chase mortgage executive David Lowman also has some concerns.

Mr. Lowman got to tell Congress all about it last week. (Apparently he has a bigger audience than!)

From his prepared remarks:

“Like all loans, mortgage contracts are based on a promise to repay money borrowed. … Importantly, there is no provision in the mortgage contract, express or implied, that the lender will restore equity or reduce the repayment amount if the value of the collateral — be it a home, a car or a stock market investment — depreciates.

“If we re-write 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? What responsible regulator would want lenders to take such risk?”

Nicely put, sir.

I’m in a real quandary here, because conceptually I don’t like the idea of widespread principle reductions… I think it’s a GREAT short-term solution, and would provide amazing relief to a lot of financially doomed people. But long term, I worry that it sets a bad precedent and will fundamentally change the mortgage industry as we know it.

On the other hand, maybe that’s not such a bad thing after all. Maybe the era of easy mortgages is why we find ourselves in this particular mess right now… Maybe you SHOULD have to save up a ton of money before you buy a home, to demonstrate to lenders that you are serious and committed to making it work.

Maybe it was just too easy to jump into a mortgage with little-or-no savings invested in the purchase, and thus little reason not to walk away from the home when things get tough. Maybe we need to make it difficult and expensive to purchase a home.

Easy for me to say, now that I’ve already gotten in, isn’t it?

One Response to JPMorgan Chase vs. Mortgage Modifications

  1. Anthony says:

    They shouldn’t usually be required to do any adjusments, but they should have a system in place to do so. Many of them would have saved massive amounts of money since they would have then at least been able to get a significant portion of the loan to remain on the books, instead of stubbornly refusing to compromise, and ending up with foreclosed properties that they could recover pennies on the dollar, or in some cases, barely anything at all. There have been houses foreclosed on, sitting empty for a year or more, only to be sold for 25% of their value. The loan holders would have been far better off getting 75% back over the long term by modifying the loan.
    The frustration for me was that in isolated cases, it has no greater impact, but at the scale that these were happening, it had a significant impact on the immediate and future US economy. At that point, the gov’t should be able to yell at the bank and tell them to bite the bullet and make some compromises instead of stubbornly going down on the sinking ship saying “no i ain’t gonna”. The banks that did realize that they were working against themselves did so far far to late to make any real differences, years after the problem was clear to everyone else.

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