Banks unlikely to grant mass mortgage bailouts
The nation's banks suddenly find themselves under pressure to throw greater lifelines to their most troubled mortgage borrowers.
The Associated Press
NEW YORK — The nation's banks suddenly find themselves under pressure to throw greater lifelines to their most troubled mortgage borrowers. But don't expect every borrower in trouble to get a bailout.
Bank of America already has announced it would forgive some of the principal for homeowners who owe more than their homes are worth. And the Obama administration will announce Friday a plan that would reduce the amount other struggling borrowers owe, two people briefed on the matter said.
The two people declined to be identified because the program had not yet been announced. But Herbert Allison, an assistant Treasury secretary, told reporters Thursday that officials are close to expanding the administration's $75 billion foreclosure-relief effort.
Government money will help many homeowners. But legal, logistical and financial obstacles may make it harder for banks to extend mortgage relief to the masses.
Allison cautioned Thursday that an extension of government aid is "not going to mean that all underwater mortgages are suddenly in the program." A mortgage is underwater when it exceeds the value of the property it is tied to.
A big problem is that most of the troubled mortgages aren't owned by the banks themselves. They were sliced and diced into securities during the housing boom and sold to investors.
To trim principal payments on those mortgages, banks often need permission from investors who holds the securities, who may not be willing to take less.
Banks can write down principal on mortgages they're authorized to control. But for mortgages held by outside investors, they "really don't have the power to overcome those legal obligations to the buyers of those securities," banking analyst Nancy Bush said.
Making things more complicated are second mortgages, or so-called "piggyback loans." Many lender made such mortgages during the boom years, allowing consumers to make a small or no down payment.
Worrying that they won't be repaid, lenders who extended second mortgages have been using their veto power to block borrowers' efforts to modify their primary mortgages.
Bank of America spokesman Rick Simon said "a good portion" of the bank's private investors have authorized it to modify the mortgages. He said, however, the principal-reduction process gets more complicated when dealing with second mortgages owned by outside investors.
But part of the government's relief program, which modifies second mortgages, could eliminate that hurdle. Citigroup on Thursday became the fourth large lender to commit to the program, part of the Obama administration's $75 billion loan-modification plan. Bank of America, Wells Fargo, JPMorgan Chase already participate.
Another positive sign: Investors who are increasingly in limbo as borrowers go underwater want some relief too, even if that means they make less money on the loans, said Jesse Litvak, a mortgage-bond trader at Jefferies & Co. in New York.
"People are starting to come to the conclusion that they would like some closure to the matter, rather than having this thing just get kicked down the road."
Even if the government makes it easier for banks to agree to reduce principal payments, they may be reluctant to embrace the idea. A big concern is the precedent it would set, Bush said.
Banks run the risk of being pressured into making concessions on other types of loans.
"If you're a commercial borrower and you're having tough times, do you go back to the till and ask to restructure your loan?" Bush said.