Banks Increasing Mortgage Forgiveness as Deadline LoomsKathleen M. Howley
Banks that agreed to help troubled borrowers as part of a $25 billion settlement over mishandled foreclosures accelerated efforts as the most generous terms of the deal head toward expiration.
Bank of America Corp., JPMorgan Chase & Co., and three other banks in last year’s agreement spent $42.3 billion in aid such as principal reductions, refinancings and home-equity loan forgiveness through the end of 2012, compared with $21.9 billion through the third quarter, according to figures today from the settlement’s independent monitor, Joseph Smith. Forgiveness of primary mortgages rose to $6 billion from $2.6 billion.
Banks are stepping up principal reductions to take advantage of terms that give extra credit for speedy resolutions before the bonus expires on Feb. 28. They focused for the first 10 months on so-called short sales that let homeowners avoid foreclosure by selling for less than they owe on their mortgages. By the end of 2012, banks had spent $19.5 billion in short sales, where owners sell for less than they owe, up from $13.1 billion in September.
“It’s not a party, we’re not home-free, but it’s a big increase in mortgage aid, and that’s going to help both borrowers and the housing market,” said Christopher Mayer, a real estate professor at Columbia Business School in New York.
The housing market recovery has been gaining strength as mortgage rates near record lows spurred purchases and unemployment eased. About 4.66 million previously owned houses sold last year, the most since 2007, the National Association of Realtors said today in a report. Prices gained 12 percent in January from a year earlier, the biggest 12-month increase since 2005.
Seriously delinquent U.S. mortgages fell to the lowest level since 2008 in the third quarter, the Mortgage Bankers Association said today. Loans 90 days or more behind or in the foreclosure process improved to 6.78 percent of mortgages from 7.03 percent in the previous three months. The rate was 7.73 percent a year earlier, the Washington-based group said.
JPMorgan, the biggest U.S. lender by assets, provided $7.9 billion of relief to 87,000 homeowners through December, the New York-based company said in a statement today. That includes about $3 billion of refinancings to people with homes worth less than they owe and almost $2 billion of principal reductions, JPMorgan said.
Bank of America reduced about $7 billion of first-lien principal and cut $9.8 billion of home-equity debt, the company said today in a statement. Wells Fargo said it cut about $1.7 billion of primary mortgage and home-equity principal.
In the Feb. 9, 2012, mortgage agreement with federal regulators and 49 state attorneys general, Bank of America, JPMorgan, Citigroup Inc., Wells Fargo & Co. and Ally Financial Inc. settled federal and state allegations of fraud and other misconduct without conceding guilt, receiving immunity from state civil cases. The accord created the Office of Mortgage Settlement Oversight now supervised by Smith, the former North Carolina bank commissioner.
“I’m happy the banks have done as much as they have in consumer relief,” Smith said in an interview today. “What I’m hearing in the field is we have a long way to go on servicing standards. I’m not declaring victory.”
The agreement requires lenders to make more than 100 changes in the way they service loans, according to Smith. The firms are banned from pursuing foreclosure while borrowers are seeking loan modifications, and the banks must comply with new standards for ensuring documents used to seize homes are valid.
Banks receive different amounts of credit toward their quota for consumer relief depending on what type of aid they give. Credit for principal reductions ranges from $1 to 45 cents on the dollar, contingent on how far underwater the loan has fallen, and whether it’s owned by the lender or managed on behalf of investors. Home-equity loan forgiveness earns credit of 90 cents on the dollar if it’s up to 90 days late, and 50 cents if three months to six months overdue.
Banks get an additional 25 percent credit for first or second lien principal reductions or credited refinancing during the first 12 months of the program. If their quota isn’t met within the first three years, banks will have to pay penalties.
This year, 13 banks including Bank of America, HSBC Holdings Plc and Morgan Stanley settled with regulators over similar charges including so-called robo-signing, the fraudulent endorsement of affidavits used in foreclosures. The collective $9.3 billion of agreements free them from complying with a 2011 order by the Federal Reserve and the Office of the Comptroller of the Currency mandating they pay for and provide documents for independent reviews of foreclosures in which borrowers claim bank malfeasance.
Banks will pay $3.6 billion to borrowers who were foreclosed on in 2009 and 2010, with everyone receiving something, whether they lost a home through the use of fraudulent documents or their case was pursued legitimately. The regulators will appoint a payment agent and decide the amount of money each borrower receives. In the new restitution system, as in the one it pre-empts, the banks will provide the information to document their conduct.
Combined profit for all commercial banks in the U.S. advanced to a record $130.2 billion last year, beating a 2006 peak of $128.1 billion, according to Hamilton Place Strategies, a Washington consulting firm. Net income was helped by an increase in mortgage lending, particularly loan refinancings, said Patrick Sims, the firm’s research director.
“Banks are paying big mortgage settlements -- it’s definitely a big expense for them -- but they have set aside reserves for that,” Sims said. “With the improvement in the economy and less troubled loans, banks now can take their capital and apply it to more profit-making activities.”