Warnings escalate on strategic defaulting yet loan modification programs drag
Shahien Nasiripour at the Huffington Post parses a J.P. Morgan filing with the Securities and Exchange Commission and notes that the bank, the second largest in the United States, is concerned about the rising tide of strategic defaulters — underwater homeowners who choose to walk away from their homes. The bank warns:
Declining home prices have had a significant impact on the collateral value underlying the firm’s residential real estate loan portfolio. In general, the delinquency rate for loans with high LTV [loan-to-value] ratios is greater than the delinquency rate for loans in which the borrower has equity in the collateral.
While a large portion of the loans with estimated LTV ratios greater than 100 percent continue to pay and are current, the continued willingness and ability of these borrowers to pay is currently uncertain.
The note comes just a few days after Freddie Mac executive Don Bisenius took to the mortgage giant’s blog and asked people not to walk away from their mortgages. The two warnings underscore just how disastrous the rise of these economically rational calculations — made by one million homeowners last year, and accounting for about one in eight defaults — might be for banks.
It makes the banks’ slow pace of mortgage modifications perplexing: The Obama administration has created a number of Treasury-sponsored housing programs, including the Home Affordable Modification Program and a new principal-writedown initiative, to shift some of the burden of housing losses to taxpayers. Today, Paul Kiel at ProPublica notes that by the end of March, the administration had spent just $242 million out of a promised $75 billion on mortgage modifications. The government has completed just 228,000 permanent mortgage modifications — and 158,000 homeowners who enrolled in the program were dropped “either because they couldn’t make the payments or because of disqualification.” A total of 2.2 million mortgages remain eligible for modification, but untouched.