In October, JP Morgan Chase said that it would start more aggressively changing the terms of home loans in order to try to prevent foreclosures. At the time, I wondered if this might be taken as a sign that the free market still works—that federal programs forcing servicers to rewrite mortgages in order to keep them affordable might not be as necessary as we think.
The problem, though, with that October announcement was that it only applied to loans Chase holds on its own books—a mere 20% of what it services. All those loans tied up in investor-owned securitizations weren’t eligible.
Until now. Today Chase announced that it is extending its program to the $1.1 trillion worth of home loans it servicers on behalf of investors. So let me restate my hopeful position that there still might be free-market solutions to the housing crisis, and that the government won’t have to step in as much as I sometimes think it will.
To gauge how justified that hopefulness is, I called up Chase and asked why it didn’t do this in the first place, back in October. The answer: it took a few months to read through every single servicing agreement to determine what the company was allowed to do by way of modification, and to build technology to evaluate whether an individual loan would be more valuable to an investor at a reduced value or in foreclosure. (Foreclosure is such an expensive process that in most cases it’s worth saving the loan, even with reduced payments.)
So I’m still hopeful. There’s still one more step, though. The vast majority of the servicing agreements Chase went through allow it to go in and make modifications, as long as they produce more value for investors—but there are some agreements that specifically restrict modifications. This is where that new law we were talking about yesterday would come in handy.
The other piece of information I still don’t have is what, exactly, Chase is doing when it modifies loans. I am assured that most modifications reduce monthly payments (historically, this hasn’t necessarily been the case), and that the tools used include a mix of lowering interest rate, extended the length of the loan, and temporarily reducing principal balance. I keep asking Chase how that breakdown takes shape, but so far they won’t tell me. As I’ve argued before, this is very important information to have in order to start to understand how to craft modifications with the most long-term success.
Barbara!