There's an unfamiliar trend emerging in America's troubled housing market. Big banks are volunteering to lose money — hundreds of millions for themselves and investors — in order to save homes at risk of foreclosure. And they're doing it in record numbers.
The year closed with a new trend: In 30 percent of private loan modifications, banks are doing a principal writedown — that is, hacking away at the amount owed as far down as the current market value. They're doing it so borrowers can actually afford payments. Two years ago, that 30 percent was just at 2 percent.
After The Housing Bubble
Bank of America is leading the charge in Massachusetts. The Jordan family of Dorchester, Mass., is a Bank of America client. Sheila May Jordan, a nurse, bought her family house in 2006. She passed away four years later.
Her daughter, Sharon Jordan, inherited the house. Rummaging through old boxes, she discovered it was on the brink of foreclosure. Her mom had stopped paying the mortgage after a heart attack. Jordan called Bank of America immediately. "Is there any way that you all can help me help myself?" she asked them. "I don't want to lose the home. We worked too hard to get it."
Her mom had bought the house for $521,000. Then the housing bubble burst. Now it's worth half that. Jordan told Bank of America, "Sell it to me, and I'll buy it from you. But I don't want to buy it at that price."
She wanted 50 percent off, which is what it's worth. That would cut monthly mortgage payments in half, too. Her solution is called a principal writedown.
But Bank of America said "no."
Testing A New Concept
Elyse Cherry took that "no" for a "maybe." She's the CEO of a nonprofit group called Boston Community Capital. Cherry knew the bubble would burst well before it happened.
"What we saw were housing prices skyrocketing even though incomes were flat," she recalls. "We had a hairdresser come in who made an annual income of $23,000. She had a mortgage of $325,000."
Housing prices have plunged back down to earth. Cherry says it's time to match affordable homes with people who can actually afford them. That's her business, in fact: Boston Community Capital runs an investment fund.
Cherry is going to the major banks with an offer: "Sell everything that you've got at current market prices, so that you clear your books, you take your losses. And then you, as a healthier lender, can go back out and lend some more."
Boston Community Capital is willing to buy the most distressed homes at the going rate, and take on the risk of reselling to homeowners like Jordan. The nonprofit actually makes some money by selling at a slight mark-up.
In a foreclosure, banks make nothing. Worse yet, they lose — in missed mortgage payments, taxes, insurance and eviction fees. Cherry's appeal is simple: "We can reduce your costs."
Principal Writedown Trend Spreads
Bank of America was the first to bite. They launched a pilot project with the nonprofit.
"We think this is a very good test and concept," says Rebecca Mairone, who leads efforts at Bank of America to help delinquent customers keep their homes. That job description might sound ironic, since Bank of America just settled a $335 million lawsuit for unfair practices related to its Countrywide unit — the largest settlement for housing discrimination in American history.
A few months ago, the bank mailed distressed borrowers some good news: They could apply to sell and repurchase their homes with the help of a Boston nonprofit. The solution isn't perfect. Some bank executives and investors are concerned that homeowners will default on payments, in what's known as strategic defaults, just to get the benefit of a cheaper house.
But Mairone says that fear is overblown. "In most cases, what we see is real hardship. People want to stay in their homes. They continue to pay. And they don't want their credit to be severely impacted as it is when a consumer stops paying their mortgage or other debt."
Turns out that other banks agree.
Laurie Goodman welcomes the trend. Her firm Amherst Securities sells mortgage-backed securities to investors. Even though her clients stand to lose millions, she says they lose millions more with foreclosures. "Most investors understand the fact they they're better off. I actually found it very, very encouraging."
Encouraging, she explains, because it's overdue housekeeping for America's economy. Banks clear their balance sheets, investors get a predictable stream of income, and homeowners stay homeowners.
Like Sharon Jordan, among the first participants in the Boston pilot project. She's just handed in her first down payment. to buy back the family home at a discount She takes a deep breath and says: "I'm nervous. I am, I'm nervous. But I can do this."