Mira Tanna, a housing advocate in Orlando, Fla., doesn't expect everyone to know the details of the recently announced $25 billion mortgage settlement, but she was taken aback, she said, when two JPMorgan Chase employees who work directly with homeowners recently told her that they were not aware of the deal nor of their bank's pledge to consider principal reduction for underwater borrowers.
A key provision of the national settlement, which resolves an investigation into wrongful foreclosures and other abuses in the "servicing" of home loans, requires Chase and four other big banks to write off about $10 billion in mortgage debt for underwater borrowers through principal reductions. The deal was announced about two months ago, and the banks said that principal reductions would become available beginning in March.
Two weeks ago, Tanna said she called the Chase Homeownership Center in Orlando to ask whether her client, a 75-year-old Orlando woman, might qualify for principal reduction. She needed an answer right away. The client, who asked that her name not be used in this story, had just been offered a loan modification by Chase with affordable monthly payments -- about one-third of what she had been paying -- but with a catch: a balloon payment of about $200,000 due when the loan matures in 2036. That's much more than the $120,000 that the house is currently worth. The client had one week to decide whether to accept or reject the modification.
Tanna, who works at Community Legal Services of Mid-Florida, said she spoke with her client's "point of contact" at the bank and also to another bank employee. "Neither were aware of the settlement," she said. "They said there was nothing they could do."
Owning a house has long been part of the American Dream. Now, for 11 million borrowers who collectively owe more $700 billion more on their loans than their homes are worth, the dream is principal reduction -- a write-down of the value of their loan to make their payments more affordable, and to make repairs and other home investments more worthwhile.
For most borrowers, though, principal reduction remains out of reach. Fannie Mae and Freddie Mac, which together control more than half of all mortgages in the United States, have refused to allow principal reduction on their loans. Nor is it clear whether private investors that control many other home mortgages will consider it as an option.
That leaves, for now, a relatively small group of homeowners whose loans are actually owned, instead of just serviced, by the five banks -- Chase, Bank of America, Wells Fargo, Citigroup, and Ally Financial -- that signed onto the mortgage deal. Some estimates have put this group of borrowers at about 500,000. Borrowers with mortgages owned by private investors, such as those bundled into bonds, might also qualify for loan write-downs, but it isn't clear whether banks will try to reduce principal on these loans or if the investors will go along.
Thomas Kelly, a Chase spokesman, declined to comment on how many loans controlled by the bank might qualify for principal reduction. It will be several weeks, he said, before the bank begins reviewing loans owned by private investors for principal reduction. Chase committed to spend $4.21 billion under the deal to help struggling homeowners, though some of this will go to refinancing and other programs
Asked whether his bank's customer service representatives are up to speed on the settlement, Kelly said in an email, "Chase continues to provide customer-facing employees with information and updates about the settlement and its impact."
Citigroup spokesman Mark Rodgers said his bank has been taking calls from customers about the settlement since March 1. "We have an analytics tool in place we are using to determine whether or not we believe a borrower may qualify for the program, and we have already moved a few hundred cases into the pipeline," he said in an email.
Bank of America is the only one of the five institutions to have estimated how many borrowers might gain relief. As part of a side deal with the federal government, the bank agreed to offer principal reduction to about 200,000 borrowers who meet a certain set of criteria: They're underwater, delinquent by more than 60 days, and facing mortgage payments that account for more than one quarter of their income.
"We have begun sending trial plan offers based on the principal reduction program guidelines to customers who were already well along in the HAMP [Home Affordable Modification Program] or proprietary modification pipeline but now qualify for a settlement modification, so they will not be delayed further," said Richard Simon, a Bank of America spokesman. "Next month, we expect to begin pro-active outreach to more than 200,000 customers who we have already identified as likely being eligible for the program, and we believe we will complete that outreach in three to six months."
Simon added that if customers with home loans held by Fannie Mae or Freddie Mac call, customer service representatives will inform them that their loan is not covered by the settlement. Otherwise, customers are being told that the program details and terms are still being finalized, and once all is ready, the bank will reach out to them if they are eligible for one of the settlement programs, Simon said.
Wells Fargo and Ally Financial did not respond to a request for comment.
STILL NO PRINCIPAL REDUCTION
In Orlando, Tanna wasn't ready to give up after she struck out with the customer service representatives assigned to help her client. Tanna said she found a phone number for Chase's corporate office on the bank's website and called, asking for the head of the mortgage division.
This strategy worked. Tanna's client was assigned a new point of contact. Tanna also received a call from Ernest Franklin Jr., a Chase executive, who told her the case was a priority for him. She said Franklin was "very helpful" and was able to explain why about $15,000 in fees had been applied to the mortgage -- something the point of contact in Orlando could not do.
But he couldn't make a principal reduction happen. According to Tanna, Franklin said that the Orlando home would be evaluated once procedures to evaluate home loans for principal reduction are in place at the end of April.
Franklin did not return a reporter's call.
Kelly, the Chase spokesman, said that he could not comment on the specifics of the case. But Franklin's answer -- that the loan wouldn't be evaluated for a few weeks -- suggests the loan is owned by a private investor, instead of by the bank. Tanna said Chase never told her who owned the loan.
Last week, Tanna's client accepted the loan modification offer. It significantly reduces her monthly mortgage bill, from $1,617 to $535 a month. The savings are possible because the interest rate has been cut from 7 to 2 percent and because much of the rest of what she owes will be tacked on to the end of the loan.
Is it a good deal? For an elderly borrower who had little chance of making the old, inflated payments, the arrangement seems reasonable. Her monthly payments are dramatically reduced. From an actuarial standpoint, it is unlikely that she will live to see the balloon payment come due. Most likely, she will make payments as long as she can, and then the house will be sold at auction.
Ira Rheingold, executive director of the National Association of Consumer Advocates, said that balloon payments were traditionally a warning sign suggesting abusive lending, but when there is no other way to make a payment affordable, this arrangement may make sense.
There is also little doubt that the woman would be better off if the bank (or investor) granted a principal reduction. Rheingold said principal reductions "give people hope and create community stability."
The woman's situation, in many ways, is analogous to renting. But, as Tanna noted, with one major difference: "If the roof falls in, she can't call the landlord."