Bankers fight calls to offer wide mortgage relief for underwater homeowners
Wednesday, April 14, 2010
Banking executives pushed back 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 probably be done more 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 relief would raise questions of fairness and could encourage borrowers who are not in distress to default, 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, a situation 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 government-controlled Fannie Mae and Freddie Mac, 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 who are significantly underwater or are in financial trouble, said Barbara Desoer, president of Bank of America Home Loans. But the practice raises questions of fairness for other homeowners who are keeping up with their payments, including those making 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 that it was revamping its marquee foreclosure-prevention program, 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 program is voluntary and expected to take months to implement.
The revamped program could prevent 350,000 borrowers from losing their homes 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.)