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Healthy mortgage adjustments

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Kai Ryssdal: Maybe you saw the story in the New York Times this weekend about banks and mortgages. The paper says some of the biggest banks — JPMorgan Chase, Bank of America, to name two — have started modifying home mortgages. They’ve given borrowers better terms. In some cases, they’ve reduced what borrowers owe.

But these aren’t loans that have blown up or been dragged into foreclosure. Quite the opposite. They’re current loans, borrowed by people who in some cases didn’t even ask for help.

We asked Marketplace’s David Gura to find out what the banks are up to. Here’s a clue: they’re not doing it out of the goodness of their hearts.

David Gura: The banks want to get ahead of what they think could be a big problem. Right now, interest rates are low, and that makes it easy for borrowers with adjustable-rate mortgages to make their payments.

Jason Kopcak is with Cantor Fitzgerald. He says in the future, interest rates have to go up and that’ll make life difficult for homeowners with these kinds of loans.

Jason Kopcak: It’s going to cause their payment to go from an artificially low payment to a more-natural payment, which is much higher than they can afford, and you’re going to start seeing additional defaults.

Kopcak says banks have been quietly modifying these loans for years. But lenders won’t say much about who is eligible for this kind of special treatment. JPMorgan Chase wouldn’t talk to us, and Bank of America didn’t call back.

Michael Fratantoni is with the Mortgage Bankers Association. He says the banks are just doing what the math tells them.

Michael Fratantoni: On the one hand, you’re looking at the likelihood that a borrower is going to continue to pay and would, in fact, be more likely to pay at a lower monthly payment, against the costs of going through foreclosure and realizing a loss once the home is sold.

The riskiest of these loans paid for homes in neighborhoods where prices dropped and haven’t recovered. Mark Vitner is an economist with Wells Fargo. He says borrowers may still be paying interest, but if the loans are underwater, that spells troubles for both the borrowers and the bank.

Mark Vitner: If a bank has a lot of these loans on its books, then Wall Street may look a little more suspiciously at that bank’s earnings.

And that’s what a bank is really worried about: what effect more mortgage problems could have on its stock price.

In Washington, I’m David Gura for Marketplace.

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