Is Bank of America Refusing to Rewrite ‘Underwater’ Mortgages?
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Related subjects: Economic Recovery, Mortgage & Credit Crisis, U.S. Economy, U.S. news Comments Off
There is federal legislation that helps banks “rewrite” or renegotiate home mortgage loans that have homeowners ‘underwater’, meaning that they now owe more money than the value of their home plus interest. Bank of America has reportedly been found to be rewriting only 7% of eligible mortgages, needlessly putting potentially tens or even hundreds of thousands of families at risk of losing their home.
It is unclear what the logic behind Bank of America’s refusal to fully participate in the program might be. Critics say the bank is determined to collect the full amount of the original loans, no matter how unlikely that prospect might be. Economists, government regulators and some competitors, argue that the bank’s failure to help more families stay in their homes is wildly irresponsible and could contribute to a rash of foreclosures and bankruptcies that will slow the entire economy for years to come.
So far this year, 94 banks have failed, resulting in their being taken over by the FDIC, the Federal Deposit Insurance Corporation, which guarantees bank account deposits up to $250,000. That guarantee was significantly increased earlier this year, from the previous level of $100,000, in response to an unprecedented number of failing home mortgages, bankruptcies, foreclosures and stock-price collapses, which threatened to undermine the entire American banking system.
That move did successfully prevent a run on the banks, and instead of the hundreds, or possibly thousands of banks that could have failed, fewer than 100 have gone under in the most stagnant lending and credit repayment climate seen in more than half a century. Bank of America could be understandably skeptical about lending, but not about making outstanding loans more affordable.
It is, ultimately, in BoA’s interest to see the majority of its borrowers able to repay the full amount of the initial loan, plus some interest, even if that interest is lower than, or the repayment period longer than, the initial loan agreement. It is even better for the bank to see the actual loan valuation lowered to suit current property valuations, in order to recover most or all of the bank’s initial investment, rather than foreclose and resell at far below market value.
Parallel to the nation’s major banks’ receiving unprecedented levels of taxpayer money in the form of emergency bailout loans and cash payments, there has been an effort by banks not only to trim their exposure to high-risk mortgages, but to trim their entire market presence in lending. Some observers believe banks on the scale of Bank of America are deliberately trying to force some clients out of the credit markets altogether, even if it will cost them money to do so.
The logic of this seems at best questionable, when the bank could help these people keep their homes, and in exchange receive significant new tax breaks, repayment supplements, AND the majority of their loan or even maximum projected repayment, repaid. But the logic for some managers is: the fewer “small investors” we deal with, the more easily we can favor high profit negotiations, by focusing on wealthy investors with major account holdings.
Economists differ greatly on the feasibility of such an approach, with some arguing the banks should do this, pare down the overall scale of their credit “exposure” and refocus on reliable, high-end investors —though this raises major legal and regulatory questions—, while others argue that such a move is misanthropic and inelastic and will lead to future “pressures” the banks don’t currently foresee.
Diversification has long been a watchword in financial portfolio management, but the nation’s major banks have shown a stubborn tendency to seek uniformity, trusting too much in the apparent ease of use that comes with it and not fearing enough the attendant vulnerability to wide market fluctuations. Problems like the unwillingness of some banks to endure the hardship of renegotiating inviable loans are now raising the question of more aggressive models of “from-within” regulation.
The Federal Reserve Bank (Fed) is proposing sweeping new monitoring programs in which regulators might set up shop inside the nation’s banks, in order to ensure “safety and solvency”, or put another way, sobriety and sustainability of business models. Bank of America’s apparent unwillingness to do what is necessary to help its borrowers stay afloat economically has been seen by some analysts as a fundamental violation of the social contract that exists between banks and their account-holders.
Is Bank of America overtly refusing to reformulate outstanding mortgages so long-term value projections are brought in line with sustainable levels of growth based on current market valuations? Or is the bank just taking its time in getting around to the work of explaining where its outsize profit projections have gone?
Is this a question driven by stock value management considerations? Is the bank afraid that too much of a downsizing of its long-term profit projections might make it seem weaker and less of a good bet for stock market investors? Maybe. But this, then, raises even more questions about the logic of sustainability and to what extent it remains absent from top-level stock-market strategy and analysis.
The banks that do the most to renegotiate inviable home loans will retain the highest return on those investments, over time. They will be more sustainable as banking operations, freer to decide what segments of the credit markets to dive into, and more relevant to the changing logic of an industry that, frankly, has gotten in over its head. Those should be the best bets for investors.
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