Many Homeowners Likely Won't Get Loan Help

A 360 Degrees Perspective

The nation's banks suddenly find themselves under pressure to throw greater lifelines to their most troubled mortgage borrowers - but don't expect every struggling borrower to get a bailout.

Bank of America has already announced that it would forgive some of the principal for homeowners who owe more than their homes are worth. And the Obama administration will announce today a plan that will expand the administration's $75 billion foreclosure relief effort by reducing the amount other struggling borrowers owe.

The changes "will better assist responsible homeowners who have been affected by the economic crisis through no fault of their own," an administration official said.

Government money will help many homeowners. But legal, logistical and financial obstacles may make it harder for banks to extend mortgage relief to the masses.

Herbert Allison, an assistant Treasury secretary, cautioned Thursday that an extension of government aid is, "not going to mean that all underwater mortgages are suddenly in the program." A mortgage is underwater when it exceeds the value of the property it is tied to.

Bank of America Corp. said Wednesday it agreed to forgive a portion of the mortgage balances for some of its most troubled borrowers. The homeowners must have missed at least two months of mortgage payments and owe at least 20 percent more than their home is currently worth. Bank of America estimates that about 45,000 customers will qualify for the relief.

The details of the government's Friday announcement were not immediately known. But its plan may be limited because of the amount of funds available and the complex structure of the mortgage business.

A big problem is that most of the troubled mortgages aren't owned by the banks themselves. They were sliced and diced into securities during the housing boom and sold to investors. In order to reduce principal payments on those mortgages, banks often must get permission from the investors who holds the securities -- who may not be willing to take less.

Bank of America and other banks can write down principal on mortgages that they're authorized to control. But for mortgages held by outside investors, they "really don't have the power to overcome those legal obligations to the buyers of those securities," banking analyst Nancy Bush said. "Their hands are tied."

Making things more complicated are second mortgages, or so-called "piggyback loans." Many lenders made such mortgages during the boom years, allowing consumers to make a small or no downpayment. Worrying that they won't be repaid, lenders who extended second mortgages have been using their veto power to block borrowers' efforts to modify their primary mortgages.

Bank of America spokesman Rick Simon said "a good portion" of the bank's private investors have authorized it to modify the mortgages. He said, however, the principal reduction process gets more complicated when dealing with second mortgages owned by outside investors.

But part of the government's relief program, which modifies second mortgages, could eliminate that hurdle. Citigroup Inc. on Thursday became the fourth large lender to commit to the program, part of the Obama administration's $75 billion loan modification plan. Bank of America, Wells Fargo & Co., JPMorgan Chase & Co. already participate.

Another positive sign: Investors who are increasingly in limbo as borrowers go underwater want some relief too, even if that means they make less money on the loans, said Jesse Litvak, a mortgage-bond trader at Jefferies & Co in New York.

"People are starting to come to the conclusion that they would like some closure to the matter, rather than having this thing just get kicked down the road," Litvak said.

Even if the government makes it easier for banks to agree to reduce principal payments, they may be reluctant to embrace the idea. A big concern is the precedent it would set, Bush said. Banks run the risk of being pressured into making concessions on other types of loans.

"If you're a commercial borrower and you're having tough times, do you go back to the till and ask to restructure your loan?" she said.

Bank of America's agreement to reduce some mortgage payments was the newest part of a deal reached 18 months ago with state attorneys general to settle charges over high-risk loans made by Countrywide Financial Corp. before Bank of America acquired the mortgage lender in mid-2008.

The government has multiple programs to try to alleviate problems in the housing market, including incentives for first-time home buyers and the mortgage modification program, known as the Home Affordable Mortgage Program.

Citi, based in New York, already participates in the primary mortgage program. Banks can offer mortgage modifications which help reduce payments for customers to more manageable levels through HAMP. There are separate parts of the program for borrowers to modify primary mortgages and second mortgages, such as home equity loans or lines of credit.

Citi said it has worked with more than 825,000 borrowers to modify all types of mortgages since 2007 in an effort to avoid foreclosure.

Other banks have also been working with homeowners to reduce payments. Wells Fargo & Co. said Wednesday it has modified more than 52,000 adjustable-rate mortgages that it inherited through its acquisition of Wachovia Corp. in late 2008. As of the fourth quarter, the bank also had reduced the principal on those mortgages by more than $2.6 billion.

JPMorgan Chase & Co. declined to comment on whether it planned a similar program.

The Wall Street Journal; Bloomberg; Fed Reserve.