Two of the largest US banks, the Bank of America and JP Morgan Chase, are helping borrowers by easing their mortgage terms or cutting their debt, and some of the grateful recipients are not even in default.
One lucky borrower received a letter last year from Chase telling her the amount she owed on her condominium would be cut in half. Her loan was for $300,000, but she wasn't in default, and although she didn't understand quite why they have chosen to do this she certainly wasn't going to turn down such a lucrative offer. However the offer was deliberately vague, and upon acceptance the interest rate was raised to around 5% so repayments remain roughly the same.
Before this offer was made this particular property owner was in negative equity, and as such was far more likely to be at risk of foreclosure as anyone in this position is more likely to move away to take a job than anyone who has a financial stake in the property.
Apparently banks are overhauling loans for borrowers who have pay option adjustable rate mortgages which were taken out in the late stages of the property boom, as these are viewed as potentially causing future problems. This type of loan allows borrowers to forgo making the principal payment and some of the interest payment for an introductory period which can last several years. The extra interest and monies owed are then added to the loan.
Although there are many homeowners who could desperately use this kind of assistance, the lucky few chosen to receive this help are often suspicious as to the motive. In March economists at the Federal Reserve wrote a paper saying they could find no real evidence that any lender is actually reducing principal on mortgages.
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