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Can banks do more?

Protesters demonstrate outside JPMorgan Chase's annual shareholder meeting

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Tess Vigeland: Not everyone will be lucky enough to get to the top. But we recently aired a story about a group of community activists who held a demonstration outside JP Morgan Chase offices here in Southern California. An executive actually did come out and met with them. One of the questions raised in that piece was why banks don't have, or at least don't use all of the tools available to them when modifying mortgages. Like reducing the principal, instead of just the interest rate.

We asked our senior business correspondent Bob Moon to follow up.


Bob Moon: In Arizona, which has been especially hard hit, Sharon Gallagher has watched the value of her Phoenix home plunge. She's making her payments, but after our story, she posted a comment on our website suggesting Chase ought to start meeting her and other borrowers half way.

Sharon Gallagher: Why can't they put some skin in the game? We have skin in the game, why can't they put some in? Why did they get a bailout?

Gallagher wonders why Chase can't split the difference. She could eat, say, $50 thousand of her loss, if Chase would do the same. That might keep her from walking away from an investment that she's convinced will never be worth what she pays. That happens to be the same kind of message those protesters delivered at their Los Angeles rally the other day.

Protesters: I'd like to know, is Chase willing to reduce the principals to the value of the homes? Why don't you drop principal to market values today, on all those homes?

But they didn't hear the answer they wanted from Gary Kishner, the spokesman sent down by the bank to address the crowd.

Gary Kishner: The goal a borrower wants is a lower payment, is that correct? We believe we can lower the payment the same way, reducing interest rate, amortizing the loan over 40 years, and we're achieving the same exact thing, which is lowering your payment and keeping, and keeping -- sir, hold on one second -- and keeping the borrower in their home.

Debora Beard was one of the struggling homeowners there that day. Chase promises she's now on the bank's priority list, but she's still worried the plan the bank wants to follow will leave her mortgage way too far underwater.

Debora Beard: At the time that I signed the papers for the loan, my home was worth $395,000. At this point, my home is only worth $169,000.

She says Chase has offered to reduce interest and extend her loan for the next 28 years at which point, a balloon payment of $157 dollars would be due.

Beard: Add the interest charges onto that, you've got like $200-, $300-thousand dollars worth of debt still. So you never own the home. It never comes to an end.

That presumes, of course, that the home doesn't recover its value. But L.A. community activist Peter Kuhns says cases like that really amount to a lifetime rental agreement, and it's little wonder mortgage modifications without principal forgiveness are more likely to fail. Better, he says, for the banks to compromise on the amount actually owed.

Peter Kuhns: We believe it makes good business sense. There's a strong argument that, in many cases, banks stand to gain more taking some hit on the principal, than foreclosing and having the home sit vacant for a long period of time.

Still, the Obama administration says fewer than 10 percent of modified loans involve principal reductions which is why some proponents are pushing for government incentives. So far, though, banks remain reluctant. They fear cutting balances for some will spur others to default, to get the same discount. Representatives of Bank of America, Citibank, Chase and Wells Fargo appeared at a recent congressional hearing and they all made it clear they consider principal reductions a last resort in limited cases. David Lowman heads the home lending division of JPMorgan-Chase.

David Lowman: Broad based principal reduction could result in decreased access to credit and higher cost for consumers, because lenders will price for principal forgiveness risk.

In other words, all borrowers could end up paying for these kinds of loan modifications if they become a new cost of doing business. He also warned they could lead to a new wave of deeper losses banks can still ill afford.

Lohman: A broad based principal reduction program could have an industry-wide cost of $700 billion to $900 billion.

Yet another sticking point is fairness. Texas Republican Randy Neugebauer complained at that hearing of the House Financial Services Committee that the wrong people are being rewarded, while most homeowners are doing what's necessary to pay what they owe.

Randy Neugebauer: Their neighbor leveraged up their house, bought a boat, charged up a bunch of stuff, put a second loan on their home, and now they're going to get created equity by either a federal program or your lending, and the people that are making their mortgage payment are going to be the losers. And there's something wrong with a system that supports that.

Critics argue mortgages don't come with a money-back guarantee, and encouraging loan principal reduction just promotes a sense of entitlement. Although Debora Beard says her neighbors don't begrudge her asking for a break.

Debora Beard: What we have had was neighbors to say, you know, "I wish you guys good luck," or, "I'm praying with you guys," or, you know, "I was almost in that same position." Or even a couple have said, "I'm in the same position."

And community activist Peter Kuhns asks with only a few hundred thousand mortgages modified out of millions still underwater, who's really acting entitled?

Kuhns: Is there a sense of entitlement for bankers that have received billions and billions of dollars in bailout money and continue to compensate their top executives with multi-million dollar bonuses?

Kuhns contends bankers should be the last ones to blame homeowners for making bad decisions.

I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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