by Broderick Perkins

JPMorgan Chase and Bank of America are reportedly modifying loans for borrowers who haven’t asked for help, in some cases slashing mortgage balances in half.

The two major banks were among others recently criticized for mishandling federally sanctioned mortgage modifications and slammed for botching foreclosures.

However, according to a New York Times report, Chase slashed one homeowner’s $300,000 mortgage in half, leaving her with a $150,000 balance.

A mortgage modification is an alternative to foreclosure and occurs when the lender reworks the terms of an existing home loan, typically to lower payments and make the home more affordable, according to Silver Spring, MD-based mortgage expert Peter Miller’s “The Quick & Dirty Guide To Successful Mortgage Modifications” (Silver Spring Press, $2.99) .

To get the payment down, mortgage modification lenders lower the interest rate, extend the loan term, reduce the principal or use any combination of those approaches.

The Obama administration has been putting more pressure on banks to reduce the principal on home loans.

“We are continuing work with the issuers of the mortgage, the bank or service company to convince them to work with homeowners who are paying to see if they can modify the loan and possibly lower principal so that they are not burdened by these huge debts,” President Obama said during the nation’s first-ever presidential Twitter town hall meeting in early July.

The two big banks appear to be attempting to reduce portfolio risk caused by their acquisition of other banks and are targeting homeowners with toxic option ARMs (adjustable rate mortgage) the Times story said.

Chase’s Washington Mutual purchase came with $50 billion in option ARM loans when it bought Washington Mutual in 2008. BofA inherited 550,000 option ARMs with its purchase of Countrywide Financial.

An option ARM gives the homeowner an option of paying only some of the interest and none of the principal for an introductory period of a few years. Because of the rock-bottom interest rate and payment plan the terms can create negative amortization, pushing the balance up every month.

When home prices crashed, option ARM holders were hit hard because they’d already lost equity with their homes due to the easy terms.

Many option ARM holders are “under water,” owing more than their home is worth.

The Times report says the reduced-principal modifications also come with a new fixed interest rate (FRM), but the borrower’s payment remains about the same.

The reduced principal also puts the homeowner in a better selling position.

Realty Times – Chase, BofA Offer Modifications Without Homeowner Request.

Advertisements