JPMorgan Joins Mortgage Restructuring Party

JPMorgan recently announced a program to offer loan modifications to 400,000 homeowners with a total of $70 billion in mortgages. The program is roughly similar to one announced by Bank of America as part of a settlement with state attorneys general of investigations into Countrywide (acquired by B of A): JPMorgan is offering to convert option ARM mortgages, one of the most poorly-conceived and worst-performing products of the housing boom, into fixed-rate mortgages at lower rates and potentially with lower loan balances. From the WSJ article:

The mortgages affected by J.P. Morgan’s program represent 4.7% of the home loans it owns or that are serviced by one of the bank’s units, EMC Mortgage Corp. While the program to give these mortgages easier terms is likely to cost J.P. Morgan billions of dollars in interest payments and loan fees, it is also likely to save the bank from the costly and lengthy process of foreclosing homes and selling them.

This is more evidence that banks see mortgage restructuring as being in their own economic interests, for reasons I’ve described earlier. (As an aside, Yves Smith wonders why banks are only offering modification programs now, when it seems like the government is about to act.) Unfortunately, it’s also more evidence that modifying whole mortgages owned by one bank is easier than modifying securitized mortgages owned by many parties who may have competing interests; this program is only aimed at mortgages owned by JPMorgan, which are a tiny fraction of the volume serviced by that bank.

Given the small scope of the program, government action is still almost certainly necessary. But private action has at least one advantage over government programs. When the government acts to encourage loan modifications for delinquent mortgage holders, millions of “responsible” homeowners who are not delinquent on their mortgages will scream. No one expects private sector banks to do anything other than act in their own interests, and so they don’t have to worry about being seen as fair.