Two major banks are modifying loans but adding to uncertainty.
Two banking giants are finally making a meaningful move -- easing terms on some high-risk mortgages -- to help revive a national housing market flattened by foolhardy home loans and the reckless poker game Wall Street played with mortgage-backed securities.
But quickly put to rest any illusion that this is an industry acting with purely noble intentions.
The big banks -- JPMorgan Chase and Bank of America -- are moving belatedly and in self-interest. They've discovered that their bottom lines will benefit more by proactively modifying some high-risk loans than by letting the properties go into foreclosure.
More disturbingly, the big banks are making up their own set of rules for loan modification in the absence of rational public policy clearly delineating which homeowners get help and which do not.
The federal government moved rapidly to provide a trillion-dollar bailout to a financial industry done in by its own excesses. That it has not put the same priority on setting and enforcing rules to assist struggling homeowners and stabilize the housing market is an outrage.
Chase and Bank of America hold on their books the toxic loans made by two infamous lenders they acquired: Washington Mutual and Countrywide Financial. As recently as April, Bank of America CEO Brian T. Moynihan said that reducing loan principal was out of the question, lest it send the wrong message to those struggling to pay their bills (never mind the message about socialized risk and privatized profits sent by the taxpayer bailout to Wall Street cowboys).
But on July 2, the New York Times reported that the two banks have quietly begun modifying a type of loan called the Option ARM, also known as the "Nightmare Mortgage." This odious product allowed homeowners to put off paying principal and some of the interest for up to several years, but plummeting housing prices left many owing far more than their properties were worth when the options expired.
According to the Times, some Option ARM borrowers are now getting letters out of the blue offering to overhaul their loans. Miami real-estate investor Rula Giosmas had the principal reduced on her condo loan by half, even though she wasn't behind on payments.
Borrowers in Minnesota are getting similar offers. Their reaction: "Is this for real?"
It's good that banks are figuring out that they're better off being proactive with loan modifications rather than waiting for default. That will help cure the vicious cycle of foreclosures that drives everyone's home values down, causing more foreclosures.
The trouble is that the process for deciding who gets a modification is still mysterious, arbitrary and inequitable. Why do homeowners whose loans ended with one bank get a write-down while others don't? Why does real-estate investor Giosmas get her principal halved while families about to lose their homes get no help?
The move by the two banks "is better than nothing, but it adds to the chaos and uncertainty," said Prentiss Cox, a nationally known foreclosure expert with the University of Minnesota Law School.
A consistent, transparent loan modification formula would quickly separate the lost causes from those who can afford to stay in their homes with some help. That approach would reduce the backlog of distressed properties and speed the housing market's recovery.
Policymakers need to make this a priority -- not leave such a critical issue to the industry that brought us the housing crisis in the first place.
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