Two of the nation’s
biggest lenders,JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands
of borrowers who have not asked for help but whom the banks deem to be at special risk.
Rula Giosmas is one of the beneficiaries.
Last year she received a letter from Chase saying it was cutting in half the amount she owed on her condominium.
Ms. Giosmas, who lives
in Miami, was not in default on her $300,000 loan. She did not understand why she would receive this gift — although
she wasted no time in taking it.
Banks are proactively overhauling loans for borrowers like Ms. Giosmas who have so-called pay option
adjustable rate mortgages, which were popular in the wild late stages of the housing boom but which banks now view as potentially
Before Chase shaved $150,000 off her mortgage, Ms. Giosmas owed much more on her place than it was worth.
It was a fate she shared with a quarter of all homeowners with mortgages across the nation. Being underwater, as it is called,
can prevent these owners from moving and taking new jobs, and places the households at greater risk of foreclosure.
a huge problem,” said the economist Sam Khater. “Reducing negative equity would spark a housing recovery.”
many homeowners desperately need help to keep their homes and cannot get it, the borrowers getting unsolicited relief from
Chase sometimes suspect a trick. Cutting loan balances, even for loans in default, is supposedly so rare that Federal Reserve
economists wrote in a paper in March that “we could find no evidence that any lender was actually reducing
principal” on mortgages.
“I used to say every day, ‘Why doesn’t anyone get rewarded for doing the right
thing and paying their bills on time?’ ” said Ms. Giosmas, who is an acupuncturist and real estate investor.
“And I got rewarded.”
Option ARM loans like Ms. Giosmas’s gave borrowers the option of skipping the principal payment
and some of the interest payment for an introductory period of several years. The unpaid balances would be added to the body
of the loan.
Bank of America and Chase inherited their portfolios of option ARMs when they bought troubled lenders during
the housing crash.
Chase, which declined to comment on its program, got $50 billion in option ARM loans when it bought Washington
Mutual in 2008. The lender, which said last fall that it had dealt with 22,000 option ARM loans with an unpaid principal balance
of $8 billion, still has $33 billion of them in its portfolio.
Bank of America acquired a portfolio of 550,000 option ARMs from
its purchase of Countrywide Financial in 2008. The lender said more than 200,000 had been converted to more stable mortgages.
B. Frahm, a spokesman for Bank of America, said it was using every technique short of principal reduction to remake its loans,
including waiving prepayment penalties, refinancing, lowering the interest rate, postponing some of the balance and extending
“By proactively contacting pay option ARM customers and discussing other products with better options for long-term,
affordable payments, we hope to prevent customers from reaching a point where they struggle to make their payments,”
Mr. Frahm said.
Chase, Bank of America and the other big lenders are negotiating with the Obama administration and the nation’s
attorneys general over foreclosures. Debt forgiveness and the moral hazard question of who deserves to be helped are among
the most contentious issues.
The banks say cutting mortgage balances would be unfair to borrowers who remain current as well as
impractical because so many loans are securitized into pools owned by investors. Bank of America’s chief executive,
Brian T. Moynihan, told the attorneys general in April that cutting principal for current borrowers would send the wrong message
to all those who have struggled to pay their bills. His counterpart at Chase, Jamie Dimon, bluntly said it was “off
Having an option ARM loan, however, apparently qualifies the borrower for special help. The loans, with their
low initial payments and “teaser” interest rates, were immediately popular with buyers who could not afford or
did not want to pay the soaring prices on houses. The problem was, eventually the rate would reset or the loan balance would
have to be paid in full. “Nightmare Mortgages” they were called in a 2006 BusinessWeek cover piece.
Option ARMs were never
quite as bad as predicted, partly because the crisis pushed down interest rates so far that the resets were relatively mild.
Many owners did default on them, but others, like Ms. Giosmas, were quite happy to pay less for years than they would have
under a conventional loan. She used option ARMs on her investment properties too.
“They saved me,”
she said. “Why would I want to pay a lot more every month? I’d rather have it in my pocket.”
The concern the banks
are showing for those who might get in trouble contrasts sharply with their efforts toward those already foreclosed. Bank
of America and Chase were penalized last month by regulators for doing a poor job modifying mortgages in default.
Adam J. Levitin, a Georgetown
University law professor, said these little-publicized programs were more evidence that the banks were behaving in contradictory
and often maddening ways.
“Loan modifications that should be happening aren’t, while loan modifications that
shouldn’t be happening are,” he said. “Homeowners of any sort, whether current or in default, would rightly
be confused and angry by this.”
The homeowners getting new loans, however, are quite pleased. In effect, the banks are
paying the debt these owners accrued as the housing market plunged.
Ms. Giosmas bought her two-bedroom, two-bath apartment north
of downtown Miami for $359,000 in early 2006, according to real estate records. She made a large down payment, but because
each month she paid less than was necessary to pay off the loan, her debt swelled to about $300,000.
Meanwhile, the value of
the apartment nosedived. By the time Ms. Giosmas got the letter from Chase, the condominium was worth less than half what
she paid. “I would not have defaulted,” she said. “But they don’t know that.”
The letter, which Ms.
Giosmas remembers as brief and “totally vague,” said Chase was cutting her principal by $150,000 while raising
her interest rate to about 5 percent. Her payments would stay roughly the same.
A few months ago, Ms. Giosmas sold the place
for $170,000, making a small profit. Having a loan that her lender considered toxic, she said, “turned out to be a blessing