Bank executives fight calls to offer wide-ranging mortgage relief
Tuesday, April 13, 2010; 6:11 PM
Leading banking industry executives pushed back on Tuesday against pressure from lawmakers and housing advocates to cut the loan balances of millions of homeowners who owe more than their homes are worth.
Reducing a borrower's principal balance is appropriate in limited circumstances and will likely be done more often over the next year, executives from Bank of America, Citigroup, Wells Fargo and J.P. Morgan Chase told the House Financial Services Committee. But widespread use of that type of mortgage relief would raise questions of fairness and could encourage borrowers who are not in financial distress to default to take advantage of such programs, they said.
"Principal forgiveness is not an across-the-board solution," said Michael Heid, co-president of Wells Fargo Home Mortgage. It "needs to be used in a very careful manner."
More than 11 million homeowners owe more than their properties are worth, known as being underwater, according to data from First American CoreLogic. These homeowners are considered at higher risk of foreclosure because they can't sell their homes or refinance their mortgages in the event of a financial setback, such as a job loss.
But cutting underwater mortgages to the value of the homes would cost the industry and taxpayers $700 billion to $900 billion, David Lowman, chief executive of J.P. Morgan Chase home lending, told the committee. That would include $150 billion in losses for Fannie Mae and Freddie Mac, the government-controlled mortgage finance companies, as well as the Federal Housing Administration, he said.
"In Chase's view, such programs could be potentially very harmful to consumers, investors and future market conditions," Lowman told the committee.
Bank of America announced a program last month to cut mortgage balances for about 45,000 homeowners. Such efforts are acceptable for customers significantly underwater on their mortgage or who are in financial trouble, Barbara Desoer, president of Bank of America home loans, said.
But the practice raises questions of fairness for other homeowners who are keeping up with their mortgage payments, including those making significant sacrifices to do so, she said. "This does not mean we should not do principal reductions for those unable to stay current, but we must do it in a measured, responsible way so that only customers with a legitimate hardship and genuine interest in maintaining homeownership qualify," Desoer said.
The committee hearing comes after the Obama administration announced last month it was revamping its marquee foreclosure prevention program, known as Making Home Affordable, to encourage lenders to offer more principal reductions for underwater borrowers. Lenders can earn incentive payments under the program for reducing the balance on a borrower's first and second mortgages. But the programs are voluntary and expected to take months to implement.
The revamped program could prevent 350,000 borrowers from losing their home this year, according to a Moody's report Tuesday. "The key to this optimism is principal reduction. As loan sizes are reduced, homeowners' probability of default will decline rapidly," the report said. Moody's still expects nearly 2 million borrowers to lose their homes this year.
Republican lawmakers questioned the fairness of mortgage relief efforts during Tuesday's hearing. "The market needs to find its own footing free of government intervention and manipulation so we can revive our economy and get on with a full housing market recovery," said Rep. Spencer Bachus (R-Ala.).