Big Banks Easing Terms on Loans Deemed as Risks.

Published: July 2, 2011
As millions of Americans struggle in foreclosure with little hope of relief, big banks are going to borrowers who are not even in default and cutting their debt or easing the mortgage terms, sometimes with no questions asked.
Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk. Rula Giosmas is one of the beneficiaries. Last year she received a letter from Chase saying it was cutting in half the amount she owed on her condominium.
Ms. Giosmas, who lives in Miami, was not in default on her $300,000 loan. She did not understand why she would receive this gift — although she wasted no time in taking it. Banks are proactively overhauling loans for borrowers like Ms. Giosmas who have so-called pay option adjustable rate mortgages, which were popular in the wild late stages of the housing boom but which banks now view as potentially troublesome.
Before Chase shaved $150,000 off her mortgage, Ms. Giosmas owed much more on her place than it was worth. It was a fate she shared with a quarter of all homeowners with mortgages across the nation. Being underwater, as it is called, can prevent these owners from moving and taking new jobs, and places the households at greater risk of foreclosure.
“It’s a huge problem,” said the economist Sam Khater. “Reducing negative equity would spark a housing recovery.” While many homeowners desperately need help to keep their homes and cannot get it, the borrowers getting unsolicited relief from Chase sometimes suspect a trick. Cutting loan balances, even for loans in default, is supposedly so rare that Federal Reserve economists wrote in a paper in March that “we could find no evidence that any lender was actually reducing principal” on mortgages.
“I used to say every day, ‘Why doesn’t anyone get rewarded for doing the right thing and paying their bills on time?’ ” said Ms. Giosmas, who is an acupuncturist and real estate investor. “And I got rewarded.” Option ARM loans like Ms. Giosmas’s gave borrowers the option of skipping the principal payment and some of the interest payment for an introductory period of several years. The unpaid balances would be added to the body of the loan.
Bank of America and Chase inherited their portfolios of option ARMs when they bought troubled lenders during the housing crash. Chase, which declined to comment on its program, got $50 billion in option ARM loans when it bought Washington Mutual in 2008. The lender, which said last fall that it had dealt with 22,000 option ARM loans with an unpaid principal balance of $8 billion, still has $33 billion of them in its portfolio. Bank of America acquired a portfolio of 550,000 option ARMs from its purchase of Countrywide Financial in 2008. The lender said more than 200,000 had been converted to more stable mortgages. Dan B. Frahm, a spokesman for Bank of America, said it was using every technique short of principal reduction to remake its loans, including waiving prepayment penalties, refinancing, lowering the interest rate, postponing some of the balance and extending the term.
“By proactively contacting pay option ARM customers and discussing other products with better options for long-term, affordable payments, we hope to prevent customers from reaching a point where they struggle to make their payments,” Mr. Frahm said. Chase, Bank of America and the other big lenders are negotiating with the Obama administration and the nation’s attorneys general over foreclosures. Debt forgiveness and the moral hazard question of who deserves to be helped are among the most contentious issues.
The banks say cutting mortgage balances would be unfair to borrowers who remain current as well as impractical because so many loans are securitized into pools owned by investors. Bank of America’s chief executive, Brian T. Moynihan, told the attorneys general in April that cutting principal for current borrowers would send the wrong message to all those who have struggled to pay their bills. His counterpart at Chase, Jamie Dimon, bluntly said it was “off the table.”
Having an option ARM loan, however, apparently qualifies the borrower for special help. The loans, with their low initial payments and “teaser” interest rates, were immediately popular with buyers who could not afford or did not want to pay the soaring prices on houses. The problem was, eventually the rate would reset or the loan balance would have to be paid in full. “Nightmare Mortgages” they were called in a 2006 BusinessWeek cover piece.
Option ARMs were never quite as bad as predicted, partly because the crisis pushed down interest rates so far that the resets were relatively mild. Many owners did default on them, but others, like Ms. Giosmas, were quite happy to pay less for years than they would have under a conventional loan. She used option ARMs on her investment properties too.
“They saved me,” she said. “Why would I want to pay a lot more every month? I’d rather have it in my pocket.”
The concern the banks are showing for those who might get in trouble contrasts sharply with their efforts toward those already foreclosed. Bank of America and Chase were penalized last month by regulators for doing a poor job modifying mortgages in default.
Adam J. Levitin, a Georgetown University law professor, said these little-publicized programs were more evidence that the banks were behaving in contradictory and often maddening ways.
“Loan modifications that should be happening aren’t, while loan modifications that shouldn’t be happening are,” he said. “Homeowners of any sort, whether current or in default, would rightly be confused and angry by this.”
The homeowners getting new loans, however, are quite pleased. In effect, the banks are paying the debt these owners accrued as the housing market plunged.
Ms. Giosmas bought her two-bedroom, two-bath apartment north of downtown Miami for $359,000 in early 2006, according to real estate records. She made a large down payment, but because each month she paid less than was necessary to pay off the loan, her debt swelled to about $300,000.
Meanwhile, the value of the apartment nosedived. By the time Ms. Giosmas got the letter from Chase, the condominium was worth less than half what she paid. “I would not have defaulted,” she said. “But they don’t know that.”
The letter, which Ms. Giosmas remembers as brief and “totally vague,” said Chase was cutting her principal by $150,000 while raising her interest rate to about 5 percent. Her payments would stay roughly the same.
A few months ago, Ms. Giosmas sold the place for $170,000, making a small profit. Having a loan that her lender considered toxic, she said, “turned out to be a blessing in disguise.”

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Fiery as ever, Laffey sets cross hairs on Providence, pensions

4:23 PM Sat, May 14, 2011 | Permalink
Barbara Polichetti    Email

EAST GREENWICH, R.I. — Drastic times call for drastic measures, and former Cranston Mayor Stephen P. Laffey didn’t pull any punches Saturday morning when telling a citizens’ watchdog group how he would solve the state’s staggering fiscal woes.

The City of Providence, which could easily topple the whole state if it doesn’t pull out of its downward fiscal spiral, needs to immediately file for bankruptcy, Laffey said, and state Treasurer Gina Raimondo should close the books on a crippled state pension program.

“Just end it — write the checks,” Laffey said as he addressed about 150 people gathered at the Varnum Armory for a financial symposium organized by Operation Clean Government.

“Just give [some employee] a check for $350,000 and say the truth; say we’re really sorry that they screwed it up over 40 years.”

“The City of Providence is never going to make a comeback,” he said later. “They need to file for Chapter 9 [bankruptcy] now.”

Citing that the state pension system is underfunded by billions of dollars and that the state budget has a huge structural deficit, Laffey, who now lives in Colorado, also urged the crowd to “humiliate” elected officials into doing their jobs properly.
“It’s over for Providence. … It’s over for Rhode Island,” he said. “You people have to publicly humiliate your elected officials.”

Laffey’s remedies for the state were countered by more moderate measures suggested by other members of the morning’s panel, which included Gary Sasse, former state director of administration and former executive director of the Rhode Island Public Expenditure Council; House Finance Committee member Democrat Larry Valencia; and Edward Mazze, a college professor and former dean of the College of Business Administration at the University of Rhode Island.

There was a general consensus, however, among the panel members that Rhode Island’s state officials are lacking in the political will and gumption needed to solve the state’s financial problems.

“We have met the enemy and the enemy is us,” Sasse said, quoting an old Pogo comic strip. “There is an entitlement mentality in the state … and with the leadership that’s the problem. They are more concerned with special interest than the public interest.”

Valencia, who is serving his first time, said he has been surprised by the number of special-interest lobbyists and union leaders at the State House, but he said he believes that the state’s problems can be sorted out by people from all points of interest working together.

Some of his remarks drew catcalls and scornful criticism from people in the audience as opposed to the cheers and applause garnered by Laffey.

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Obama will not release photos of Osama bin Laden

WASHINGTON — President Obama has decided not to release photographs of Osama bin Laden’s body, CBS News reported on Wednesday. Mr. Obama apparently concluded that images of Bin Laden bloodied by gunshots would do little to reassure skeptics but could inflame tensions in the Muslim world. He disclosed his decision in an interview for the CBS program “60 Minutes,” part of which will be broadcast on the network’s evening news programs Wednesday.


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The debate over whether to release photos of Bin Laden had consumed the White House over the last two days. Some senior officials said the release of photos was inevitable. On Tuesday, the director of the Central Intelligence Agency, Leon E. Panetta, said he did not think “there was any question that ultimately a photograph would be presented to the public.”

But officials at the Pentagon and State Department expressed qualms about releasing gruesome photos of Bin Laden’s bloodied corpse, with some arguing that the photos would not silence those who doubt that he was killed. Some lawmakers also opposed releasing the photos, arguing that doing so would serve little purpose and could endanger American troops in Iraq and Afghanistan.

“Imagine how the American people would react if Al Qaeda killed one of our troops or military leaders, and put photos of the body on the Internet,” said Representative Mike Rogers, Republican of Michigan and chairman of the House Permanent Select Committee on Intelligence. “Osama bin Laden is not a trophy. He is dead, and let’s now focus on continuing the fight until Al Qaeda has been eliminated.”

The White House said that Mr. Obama would take part on Thursday in a wreath-laying ceremony at the Sept. 11 memorial in lower Manhattan. He is also scheduled to meet with relatives of the victims of the 2001 terrorist attacks, but he will not make a speech. The White House invited former president George W. Bush to accompany Mr. Obama in New York, but Mr. Bush declined, his spokesman said.

The plans came as further details emerged about the raid on Bin Laden’s fortified house in Abbottabad, Pakistan. Administration officials said that after members of the Navy Seals shot and killed Bin Laden, they found that he had money — 500 euros (about $746) — and two telephone numbers sewn into his robes. That suggested that Bin Laden had an escape plan, which he was not able to carry out when American helicopters landed in the compound.

Administration officials reiterated that Bin Laden had not tried to surrender in the final moments of his life, and that that justified the use of lethal force by the Navy Seals. On Wednesday, Attorney General Eric Holder laid out a broader justification, citing Bin Laden’s role as the mastermind of the Sept. 11 attacks.

“It was justified as an act of national self-defense,” Mr. Holder told the Senate Judiciary Committee. “If he had surrendered, attempted to surrender, I think we should obviously have accepted that. But there was no indication that he wanted to do that and therefore his killing was appropriate.”

reported by the NY Times

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‘Hope for Housing’ group in Providence to lend to people unable to get traditional mortgages.

Providence Journal
01:00 AM EDT on Sunday, April 17, 2011
By Paul Grimaldi Journal Staff Writer



PROVIDENCE –– A Providence businessman is part of an investment group developing a private lending program to help people frozen out of the mortgage market. “We feel we’re going to be a new standard” of mortgage lending, said Henry M. Diamond, president and co-founder of HDC Inc., a Rhode Island company. Diamond, 52, is a Providence native with a bachelor’s degree from Rhode Island College and a law degree from University of Massachusetts-Dartmouth.

The “Hope for Housing” model uses under-sold or distressed condominium projects as a way to help people become homeowners and to rebuild communities. Underpinning the projects will be two funds, drawn from mortgagees’ down payments. One portion of the down payments will go into a default protection fund available to condo association members. A second portion will finance businesses within a project’s neighborhood as a way to stimulate the local economy, and by extension, raise the condominiums’ property values.

Diamond has spent most of his life as a corporate adviser and investment professional, and he brings that financial knowledge to segments of the housing market that he and his partners consider essentially frozen by current economic conditions. According to an HDC document, residential condominiums and co-ops “have been, in essence, discarded as a housing alternative” by the country’s financial institutions.

HDC is seeking $10 million in private investments to buy a prototype property, most likely here in Providence. “We’re not speculators or flippers,” Diamond said. HDC expects to service the loans, earning fees for that work. The company will not rely on traditional funding sources, such as the Federal Housing Administration, Fannie Mae or Freddie Mac, for its mortgage money.

The primary lending range will be $125,000 to $200,000, parameters within which Diamond and his partners say exists of pool of 40 million potential borrowers in the United States. The mortgages would be “pure vanilla,” he said, with terms of 15 years or 30 years, and fixed rates. “HDC’s intent is to become a key player in this residential housing market … primarily acting as a mortgage originator,” according to Thomas C. McAdam, an HDC co-founder. HDC will make most of its money on the condominium sales, with other revenue coming from the mortgage fees and interest payments on its funds.

HDC will hold on to the mortgages in the early stage but will consider selling or packaging them into securities in the future. In one way, Diamond says, his company will return mortgage lending to the out-of-fashion method of knowing customers well enough to understand when they are worth a risk unsupported by standard financial industry metrics. For instance, losing a previous home to foreclosure, short sale or unsuccessful mortgage modification won’t automatically disqualify a potential borrower.

The lending program will differ from those offered by financial institutions in that it will set aside neighborhood stabilization funds. Buyers will pay approximately 5 percent of their purchase prices into a mortgage default fund. HDC will use money from the fund to cover up to 90 days of loan payments whenever someone falls behind on their mortgage.

Another portion of net loan proceeds will go into a HOPE Development Fund. Condominium association members will be able to invest that money in businesses around their development to stabilize the neighborhood housing market.

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