Today, the House Financial Services Committee is holding a hearing to examine what is holding back banks from reducing mortgage principal (the outstanding mortgage amount) for homeowners who are underwater (owe more on their mortgage than their house is worth). Last month, after months of inaction, the Obama administration finally released the outline of a plan to encourage banks to voluntarily reduce principals.
Representatives of the banks themselves are appearing before the committee to explain their views on the new program. While the Wall Street Journal gave its article on their testimonies an inflammatory headline about rebellion, most of them are, for the moment, saying that principal reductions are indeed appropriate for a limited number of borrowers, and that they plan to follow through with Treasury’s design:
Bank of America: We are waiting for Treasury to finalize the details on this program and are very supportive of targeted principal reduction performed in a way that addresses the significant moral and financial hazards but also recognizes the reality regarding the diminished future prospects for home appreciation.
Citigroup: We expect these changes will result in more principal reductions going forward. We believe principal reductions are one of many options that must be used responsibly. We will continue to be thoughtful in how we implement these programs in scale.
Wells Fargo: In 2010, we have used and expect to continue to use principal forgiveness…In addition, absent any unexpected legal, regulatory or accounting issues that could arise from the Treasury’s detailed description of its new principal forgiveness enhancements, we also plan to implement the enhancements for first- and second-lien modifications as rapidly as possible.
But then, there is JP Morgan Chase:
We do think that large scale, broad–based principal reduction programs raise serious policy concerns, for both first and second lien mortgage loans, and particularly for current borrowers with an ability to repay their obligations. In Chase’s view, such programs could be potentially very harmful to consumers, investors and future mortgage market conditions – and should not be undertaken without first attempting other solutions, including more targeted modification efforts.
Of course, there have already been plenty of modification efforts, like the Home Affordable Modification Program (HAMP). They’ve just falling flat thanks to poor design and bank intransigence. According to the latest data, just 170,000 permanent modifications have occurred under HAMP. So are the other banks in JP Morgan’s corner, but just afraid to be seen as standing against homeowners again, or is JP Morgan the outlier here?
My main concern with Treasury’s principal reduction program is that, like HAMP, it relies too much on banks voluntarily making cuts, in return for financial incentives. As John Taylor, the head of the National Community Reinvestment Coalition, said, “I’m not optimistic that the incentives will be enough to entice servicers and investors to reduce loan principals. Will they help seven million people who are at risk of foreclosure? I will be pleasantly shocked if investors step up for half a million borrowers.”
If this is going to work, Treasury needs to step up and issue its guidance, and the program’s progress will have to be very closely monitored. Then we’ll see if the big banks are merely paying lip service to helping homeowners or if they have a genuine interest in preventing any more of a housing calamity.