Some big U.S. banks are pushing back against the idea that they
should slash mortgage balances for millions of troubled borrowers.
In written testimony prepared for a hearing in Washington Tuesday of
the House Financial Services Committee, some of the nation's top
mortgage lenders warned of the risks of relying heavily on forgiving
principal as a means of averting foreclosures and argued for
concentrating mainly on other methods, such as reducing interest rates.
That may set up a clash with Rep. Barney Frank, chairman of the
committee, and other lawmakers eager for more aggressive action to
prevent foreclosures. In a letter last month to four big banks, Rep.
Frank, a Massachusetts Democrat, argued that "to save homes on a large
scale, we must move past temporary modifications in interest rates or
terms and focus on permanent principal reductions that result in truly
The Obama administration recently announced plans to put somewhat
more emphasis on reducing principal in its foreclosure-prevention
In their testimony, executives from Bank of America Corp., Wells Fargo & Co., J.P. Morgan Chase & Co. and Citigroup
Inc. said reducing principal makes sense for some borrowers with high
risk loans. But some of the executives also stressed the risk that
principal reductions for some borrowers would lead many others to
demand the same treatment.
More than 11 million households are underwater, owing more on their
mortgages than the current value of the home, estimates First American
CoreLogic, a data provider.
To write down loans enough to bring those debts down to no more than
the home values would cost $700 billion to $900 billion, J.P. Morgan
Chase estimated in its testimony. That would include costs of $150
billion to the Federal Housing Administration and government-controlled
mortgage investors Fannie Mae and Freddie Mac, the bank said.
J.P. Morgan also said broad-based principal reductions could raise
costs for borrowers if mortgage investors demand more interest to
compensate for that risk. Borrowers probably would have to increase
down payments, and credit standards would tighten further, the bank
Wells Fargo said principal forgiveness "is not an across-the-board
solution" and "needs to be used in a very careful manner." Bank of
America said that it supports principal reductions for some customers
whose debts are high in relation to their home values and who face
financial hardships but that "solutions must balance the interests of
the customer and the (mortgage) investor."