Banks will push the Obama administration to expand its mortgage-modification program to allow interest-only periods on reworked loans, seeking to bring more homeowners into the initiative while recognizing concern that it may only postpone defaults, according to JPMorgan Chase & Co.
“We’re working with our peers to develop a proposal to present,” Douglas Potolsky, a senior vice president at JPMorgan’s Chase home-loan unit, said yesterday at a Mortgage Bankers Association conference in San Diego.
The suggestion reflects a new round of ideas and plans to refine the $75 billion “Home Affordable” program, announced in February as a bid to rework as many as 4 million loans to ease a housing slump now showing signs of ebbing. The program’s latest phase also is marked by a need to permanently convert more than 500,000 trial modifications by collecting paperwork so consumers’ mortgage payments don’t revert within months.
“Our primary goal for the next few weeks is to make sure we convert all of those borrowers, or as many as possible,” Laurie Anne Maggiano, director of the Treasury’s policy office for homeownership preservation, said at the conference. “It’s a huge push for the Treasury and all of its partners.”
Only “a couple thousand” conversions have been completed, Maggiano said. To aid the process, the government last week streamlined documentation requirements, and granted borrowers and loan servicers on initial trials an extra two months to complete the work, which typically must be finished after three months of timely payments, she said.
By next week, the Treasury will announce details of a program to encourage so-called short sales of properties -- for less than mortgage amounts -- by homeowners who don’t qualify for modifications, Maggiano said. It will include “capped” payments to retire second mortgages that may form an “industry standard” and help curb the “back and forth” with owners of that debt which creates one of the biggest hurdles, she said.
An unresolved piece of the administration’s program, she said, remains a plan to have second-mortgage owners rework that debt whenever first mortgages are changed, an initiative that U.S. officials said would likely be in effect by June when outlining it in April.
Last week, Treasury Secretary Timothy Geithner said the program reached an initial goal of 500,000 trial modifications on Oct. 6, beating the Oct. 31 target set by the administration in July. The figure represents about 40 percent of 1.2 million delinquent homeowners deemed probably eligible.
About 9 million borrowers headed toward foreclosure represent the largest threat to U.S. home prices, which indexes have shown rising in recent months, according to a report last month by Amherst Securities Group analysts in New York.
Under the federal program, taxpayer subsidies to lenders, servicers and homeowners are used to encourage the reworking of borrowers’ mortgages to cut their monthly payments to 31 percent of their incomes. Servicers are first directed to lower interest rates to as low 2 percent, then extend terms to as long as 40 years and then suspend payments on a portion of the debt until maturity.
The benefit of allowing interest-only periods as well would be “a significant pickup in terms of mods being done,” because the current methods often fail to allow loans to pass required tests on whether modifications serve lenders better than foreclosures, said JPMorgan’s Potolsky. The New York-based bank uses interest-only periods in many of the modifications it’s doing outside of the U.S. program, he said.
Banks “understand the concern” that using the periods to cut payments would mean borrowers’ balances won’t decline and their bills may later jump, Potolsky said. For certain borrowers, such as many with “option” adjustable-rate mortgages, it’s hard to pass “net present value” tests without the periods, said Faith Schwartz, executive director of Hope Now Alliance, a Washington-based non-profit coalition of lenders, regulators and servicers.
Interest-only periods of five or 10 years would mean less risk of defaults only being delayed, according to Don Bisenius, an executive at Freddie Mac, the government-controlled mortgage- finance company that’s hiring outside firms to send people to borrowers’ doors to collect documents for the program.
“That’s a long time for an economic environment to change,” Bisenius, executive vice president of the company’s single-family credit-guarantee business, said in an interview.
To help move more borrowers out of trials, the Treasury last week dropped a need for them to provide tax returns, Maggiano said. Servicers instead will be able collect documents allowing information to be pulled directly from the Internal Revenue Service, a process it’s trying to enhance with new forms and processes, she said.
Other document changes mainly involve creating more “customer-friendly” layouts, Schwartz said. The changes aren’t similar to the “stated-income” lending popular during the housing boom that later created high defaults, she said; pay and employment information still is verified.
The documentation process is more akin to the underwriting of new loans than previous modification protocols as the government seeks to protect taxpayers, leading to delays being created by issues such as pages “being signed but not dated, or dated and signed but not by both borrowers,” said Ingrid Beckles, senior vice president of default asset management at McLean, Virginia-based Freddie Mac.
JPMorgan may have been unable to complete a “material” number of the modifications the bank started without certain of the changes, Potolsky said.
Mortgage insurers meanwhile have developed protocols to encourage servicers to eschew foreclosures for more loans they back, which are often failing net-present-value tests because of their potential payouts, according to John Jelavich, vice president for homeownership preservation initiatives at Walnut Creek, California-based PMI Group Inc.
Under their “MI Second Look” program, developed in discussions with the government, insurers are starting to cut deals by offering partial claims on modified debt, he said.