JP Morgan Chase, the Bank of “No”

Shahien Nasiripour of The Huffington Post, wrote a great article recently regarding the top brass at Chase arguing against loan modifications, citing the “sanctity of contracts.”

On the surface this may seem like a black and white issue, but it’s not. While it’s hard to argue against the “sanctity of their contracts,” being correct in this instance is almost irrelevant. Yes, all of your contracts can be enforced and you are not required to modify a single loan. Now what?

Perhaps Chase is under the impression that the majority of homeowners seeking assistance are just trying to get out of/modify their mortgages for the fun of it – to save a couple bucks - and once the request is denied, they’ll go back to happily paying their mortgage as they once did.

Not likely.

The reality is, most people will end up being foreclosed on. By not working with their customers, Chase will take back hundreds of thousands of homes – on top of the inventory they’re already stockpiling. Banks are not set up to manage properties, nor is it profitable for them to do so. If /when those homes finally are sold and off the books, it would be for far less than what was originally owed on them. As people start filing for bankruptcy – particularly chapter 7 – the ability for Chase to collect on the deficiency is gone. Now they’re stuck with whatever fraction of the original mortgage is left over, minus the costs to maintain the home, pay taxes and legal fees, etc., with no chance to recoup their losses.

Lowering the principle or approving a short sale will significantly curb those losses.

Take a home with a $200k mortgage. Chase refuses to work with their customer on a modification and forecloses. The home lists as an REO months later, for $120k. Now, all the homes on that street take a similar hit. After all, a home’s value is really only worth what someone is willing to pay for it. As more homeowners find themselves in similar positions (the delinquency rate is currently about 1 in 4), the values continue to decline.

Let’s not forget what all those abandoned/vacant homes will do to neighborhood values as well. Pay me a visit here in Detroit - I’d be happy to tour you through that reality.

For each home they take back and inevitably sell for less, they’re bringing the value down themselves, likely depreciating other investments of their own (as the 4th largest US residential mortgage lender, it’s a safe assumption they’ll have some other properties in the neighborhood). Instead of simply fixing the problem now with principle reductions, they’d rather just let the same thing happen via foreclosure, only over years and years and years.

Had they modified that same mortgage to $120k (or even $150k) from the start, they could have stopped the bleeding immediately and began the recovery. In a couple years, prices might not be up to where they were, but at least they’re no longer dropping.

And most important, principle reductions will keep money flowing in! Sure, it might be less of a flow than what Chase would like to see, but it’ll be considerably more than what “no” brings them – nothing…