Consumer Law

JPMorgan Chase Argues Against Mortgage Modifications

By M. Stan Herring

The Huffington Post has posted an article about JPMorgan Chase's pitiful argument against mortgage modifications. They're saying that the "sanctity of contracts" should require borrowers to repay their full loans without modification.

The company is against the Obama administration's attempts to get investors and lenders to decrease a home mortgage's outstanding debt and basically says that borrowers don't deserve the help and should just deal with the consequences of the plummeting housing market...which is really ironic since they had to be bailed out with taxpayer money.

Like all loans, mortgage contracts are based on a promise to repay money borrowed," Lowman's prepared remarks read. "Importantly, there is no provision in the mortgage contract, express or implied, that the lender will restore equity or reduce the repayment amount if the value of the collateral -- be it a home, a car or a stock market investment -- depreciates.

Banks claim that the sanctity of contract requires the home owner to repay in full; however, "the contract isn't absolute" and should be looked at differently when the market has been in such a crisis. Contracts can also be written and rewritten again and again.

If a borrower loses his home to foreclosure, the first lien is repaid first off the subsequent sale. Whatever proceeds are left go to second and subsequent liens; if nothing is left -- for instance, if an underwater borrower is foreclosed on and the sale of the foreclosed home doesn't even satisfy the outstanding first lien -- then the second and subsequent liens are worthless. They don't get a penny.

Based on that priority of payments, holders of first lien mortgage debt argue that those holding junior liens should take the first hit when it comes to modifying mortgages -- after all, if the home enters foreclosure, that's how it will play out.

Since nearly all mortgage modifications involve homeowners who are likely to default, investors argue that the second-lien holders should write down their holdings, take their losses, and get out of the way so troubled homeowners -- free of junior-lien debt obligations -- will have a chance to stay in their homes. Investors, after all, want homeowners to stay in their homes so they can continue getting paid; a foreclosed home rarely results in a profit to investors.

The sensible thing is for these megabanks to just reduce the amount owed on junior liens. But banks don't want to give up their holdings so easily, especially since there's $448 billion at stake. If banks were to write down their propositions and just accept the profit losses, a second bailout might be inevitable. A second bailout certainly wouldn't be a popular option with taxpayers...if they don't want to give the borrower a second chance, why should they get a second one with the borrowers' money?

If you would like more information on foreclosures, please check out our articles The Three Stages Of Foreclosure In Alabama and Wrongful Foreclosures In Alabama.

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Full post as published by Alabama Consumer Blog on April 19, 2010 (boomark / email).