Banks Quietly Cut the Principal on Some Mortgages

blr-editor | July 3, 2011 | Comments (1)

Some are getting their loans reduced without asking

The New York Times is reporting that some banks, including JP Morgan Chase and Bank of America have begun to modify terms on loans that are not even in default, reducing balances and improving other aspects of the loans.

More than a quarter of all homeowners in the United States are underwater and this may be the reason why the banks are seeking to stem the number by proactively modifying some loans that may be headed into default in the next couple of years.

The story in the New York Times continues:

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.

Before Chase shaved $150,000 off her mortgage, Ms. Giosmas owed much more on her place than it was worth.

The strange thing is that many homeowners who are actually in trouble have no success in receiving relief, while homeowners like Ms. Giosmas, whose payments were up to date, have received relief.

Many of those receiving relief have Adjustable Rate Mortgages, which are likely to rise as interest rates begin to creep up.

Banks in the past have been strident about the moral hazard that forgiving loans would represent and have refused all encouragement from the Obama administration to do so.

However, it seems that they may be doing exactly the opposite in a late realization that abandoned properties are usually worth less than a modified mortgage. Whether this becomes a widespread systemic action or remains isolated incidences only time will tell.

Do you know anyone who’s loan was modified by the mortgage holder without asking?