Mortgage Debt Relief For Distressed Homeowners Won't Hurt Big Banks, IMF Says
NEW YORK -- A broad mortgage debt-relief program for distressed homeowners would not significantly impact the nation's four biggest banks, according to a report released this week by the International Monetary Fund.
Bank of America, JPMorgan Chase, Citigroup and Wells Fargo have enough money to withstand the resulting losses, IMF economists projected in their report.
The findings cast doubt on the notion that a broad-based program to reduce troubled homeowners' mortgage debt would hurt the nation's financial system.
If the four lenders established a year-and-a-half long program to reduce debt on first mortgages by 15 percent for borrowers at risk of foreclosure, and also worked to lower loan balances by 30 percent until 2015 for seriously-delinquent borrowers and those in foreclosure, they'd face little consequence, the IMF said.
"Our stress tests highlight the capital strength of U.S. banks," the organization said in its report, noting the lenders' ability to manage "even under a severe shock."
State attorneys general and some federal agencies are seeking to penalize the nation's five biggest banks for abusing homeowners and breaking federal rules and state laws during the foreclosure process. Officials are pursuing as much as $30 billion in fines.
Federal bank regulators at the Office of the Comptroller of the Currency object to those efforts, instead pursuing modest fines and a redesign of how mortgage firms treat borrowers to ensure abuses don't occur going forward. Some Republicans in Congress have argued that a broad-based mortgage relief program would hurt banks' balance sheets and impede lending.
The costs associated with a widespread principal reduction effort -- which would impact millions of homeowners -- as forecast by the IMF is significantly greater than what is currently under discussion by state and federal officials in the foreclosure abuse probes.
The nation's five largest mortgage firms have saved more than $20 billion since the housing crisis began in 2007 by taking shortcuts in processing troubled borrowers' home loans, according to a confidential presentation prepared for state attorneys general by the nascent consumer bureau inside the Treasury Department and obtained by The Huffington Post.
The report, prepared by the Bureau of Consumer Financial Protection, suggests the $20 billion figure should be used as a starting point in settlement discussions with the targeted firms. Many more billions would likely have to be levied as penalties to discourage the firms from taking a similar approach in the future and compensate homeowners for abuses, including reducing distressed borrowers' loan balances, some officials have argued.
The IMF's projections came as part of a report that touched on the problems afflicting the nation's housing market.
Purchases of new U.S. homes dropped in February to the slowest pace on record, according to the Commerce Department. Prices declined to the lowest level since 2003, according to the National Association of Realtors. About 6.9 million homeowners were either delinquent or in foreclosure proceedings in February, according to Lender Processing Services, a Florida-based data provider.
More than 2.8 million homes received a foreclosure filing in 2009, and nearly 2.9 million residences received a foreclosure filing last year, according to RealtyTrac, a California-based data provider.
Government programs designed to reduce monthly mortgage payments -- like the Obama administration's signature effort, the Home Affordable Modification Program -- have had limited success. Industry programs to mitigate foreclosures have had a similarly lackluster result.
"The primary shortcoming has been the inability to induce the payment reductions needed to address borrowers' high-debt profiles and/or the principal reductions to address the large negative equity position of many homeowners," the IMF said in its report.
Nearly a quarter of homeowners with a mortgage owe more on that debt than their homes are worth, according to CoreLogic, another real estate data provider. Underwater homeowners collectively owe $751 billion more than their homes are worth.
"As a result, modified loans have had high redefault rates, slowing homeowners' efforts to de-leverage and restore their credit scores and lengthening the foreclosure process," the IMF wrote in its report.
The average borrower in foreclosure has been delinquent for 537 days before eviction, up from 319 days in January 2009, according to LPS.
"These considerations suggest that more structural policies, such as renegotiation or some form of debt reduction -- including writedowns of mortgage principal by banks -- may be needed," the IMF wrote in its report.
The international organization said its analysis "suggests that banks in the United States have room to take such measures, which could help relieve some of the problems in residential real estate markets."
Representatives from 10 state attorneys general offices, along with officials from the Justice Department and the Department of Housing and Urban Development, met with banks again this week, the second time they've discussed the ongoing investigation with bank representatives, Associate U.S. Attorney General Tom Perrelli said on a conference call with reporters on Wednesday.
A settlement that includes reducing distressed homeowners' mortgage balances is still on the table, officials said, despite banks' objections.