Government Programs to Prevent Foreclosure Rejected by Major Banks

During the economic boom, many banks had given mortgage loans without checking the ability of the borrowers to pay the loan back. As a result, many Americans are stuck with huge mortgage debts that they cannot pay and face the threat of foreclosure.

In order to help people deal with their underwater mortgages, the government has come up with many schemes such as buying mortgage backed securities and launching debt consolidation programs for mortgages. One such scheme is mortgage modification through reduction of the principal amount of mortgages.

The principal reduction program involves encouraging lenders to reduce mortgage balance for those borrowers who qualify for the program because of their inability to make payments and prevent foreclosure.

Another program on similar lines encourages lenders to refinance loans for borrowers whose mortgage debt outweighs their finances. The borrower will get a government-insured loan at market value. It has been argued that this will reduce the chances of the borrower walking away from the mortgage. At the same time, the lender would not have to face losses because of a foreclosure procedure.

However, JP Morgan Chase, the leading Wall Street bank, has rejected the government’s proposal. A spokesperson gave many reasons for the bank’s policy of not reducing the principal, except in some rare cases. He said that people who took loans beyond their means are being rewarded for their faults by this policy. Moreover, it will increase mortgage costs and would be harmful for those who are planning to buy houses in the future.

The chief executive of JP Morgan Chase for Home Lending, Mr. David Lowman, recently stated in a House Financial Services Committee meeting that the bank does not support broad based principal reduction policy as a solution for unpaid mortgage debts.

JP Morgan Chase is also unhappy about the proposal for refinancing mortgages. It considers it unfair that the mortgage should be refinanced merely because the cost of the property has declined. This was a risk that the borrower chose to take and there would not be any incentive for lenders for giving a mortgage loan in future if such practices are followed, according to the bank.

The administration had been pressurized by citizen groups and legislators into taking steps for helping house owners deal with this crisis. But its efforts might prove to be futile without the support of banks like JP Morgan Chase, which is proving to be quite difficult to get.

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