December 24, 2024

Big Banks Easing Terms on Loans Deemed as Risks

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.”

Article source: http://www.nytimes.com/2011/07/03/business/03loans.html?partner=rss&emc=rss

Bucks: Lured Back to Adjustable-Rate Mortgages

Wouldn’t it be nice to have a mortgage where the interest rate begins with the number “3?”

More borrowers seem to think so, as more of them are opting for adjustable-rate mortgages, whose rates have become even more alluring compared with fixed-rate mortgages.

The rate on a 5/1 adjustable-rate mortgage — that is, a loan where the interest rate is fixed for the first five years and adjusts annually thereafter — is 3.23 percent on average, or about 1.35 percentage points less than a traditional 30-year fixed-rate mortgage, according to HSH.com, which publishes mortgage and consumer loan information.

Lured in by the attractive rates, about 12 percent of the $325 billion in new mortgages made were adjustable-rate loans, known as ARMs, in the first quarter. That compares with 9 percent of new mortgages issued in the fourth quarter of last year, according to Inside Mortgage Finance, a newsletter that tracks the mortgage industry.

During the housing boom, borrowers — especially those with spotty credit histories — took out ARMs in droves. In 2006, 45 percent of mortgages issued were ARMs. But we all remember how that movie ended: Just as many of these borrowers’ loans were about to reset to a much higher rate, the housing market crashed and many people couldn’t refinance into another loan with a more manageable monthly payment. In many cases, borrowers didn’t fully understand what they were signing up for, since the loans carried complex features that either weren’t disclosed or were hard to comprehend. Others simply got in over their heads.

“By and large, the ARM market was polluted by the abuses that went on with subprime mortgages,” said Guy Cecala, publisher of Inside Mortgage Finance, adding that “prime” mortgages sold to borrowers with solid credit histories tend to have much clearer terms. Now, “both borrowers and lenders are getting more comfortable with ARMs again.”

The ARMs being used most frequently are known as hybrid ARMs, which means there’s a period, say three or five years, where the interest rate is fixed. That offers some protection against a spike in interest rates, but there’s still the possibility your payments may rise to a less manageable level later (and that you won’t be able to unload your home if you need or want to sell).

Consider a borrower with good credit who needs a $200,000 mortgage. A 30-year fixed mortgage will carry a rate of about 4.49 percent, which translates into a $1,102 monthly payment. But the borrower could save about $128 each month by taking out a 5/1 ARM with a 3.375 percent rate, which translates into a payment of $884 per month. Over five years, that’s a savings of about $7,680.

“If you know you will sell the home within five years, then it’s a no-brainer,” said Rick Cason, owner of Integrity Mortgage, a mortgage firm in Orlando, Fla., who provided the numbers. “But most people are unsure about what the future holds for themselves or the housing market.”

That’s why it’s important to understand the inner-workings of the ARM, if you decide to go that route. All traditional ARMs have caps and floors, which state how much the rate can change over the life of the loan.

For instance, the typical 5/1 ARM has what’s known as a 5/2/5 cap, explained Mr. Cason. Here’s how that translates into English, using the loan with an initial 3.375 percent rate: The first “5” determines how much the rate can increase (in this case, five percentage points) above the initial rate during the first year after the fixed period is over (So it can climb as high as 8.375 in year 6).

The “2” is the maximum amount the rate can change in any year after that. And the last “5” is the maximum amount the interest rate can adjust from the original rate over the life of the loan. So, at least in this case, the loan wouldn’t rise above 8.375 percent. But all borrowers should make sure they can afford to make payments based on that higher rate, should the worst case actually happen. (You can run the numbers yourself, using different interest rates, on an amortization calculator).

Now you can see why Elizabeth Warren wants to make sure all of this is explained in plain English.

When Mr. Cason walks his clients through the details, he said most of them decided to stick with the stodgy but reliable 30-year fixed loan. “Fixed rates are too low without the risk of adjustment in the future,” he added. “I am not seeing many people in Orlando choose an ARM product.”

What do you think about ARMs? Would you take one now if you figured that you would be moving in three to five years?

Article source: http://feeds.nytimes.com/click.phdo?i=60aebf96b8109976357e97da2cdc3479