Chris B

BoA Cuts Off Countrywide ARMs to Save Body of Mortgages

One would think that there would be an agressive, bustling business in loan modification so that banks could avoid dealing with foreclosures in a dead housing market. For example:

1) Suspending the mortgage for 2-3 years and having the bank just require a payment the equivalent of rent. Then after 2-3 years restarting the mortgage with the additional payments added to the end of the loan. Even if the loan eventually defaults, the bank gets 2-3 years of rent and 2-3 years of time out of the deal. I'd certainly rather auction a house in 2-3 years than now.

2) Interest rate cuts. They have to be cheaper than foreclosure! Why aren't banks cutting their losses?

3) Write-offs of the negative equity portion of the loan. It's not like the bank would ever get this money anyway. After taking this loss, you have a loan that is sellable because it matches the value of the collateral. Plus you've harvested some losses for tax purposes.

Of course, the problem preventing the implementation of any of these solutions is the fact that these individual loans are "securitized" and are owned not by the local banks that could implement the plans, but by foreign companies and SWF's. There is a disconnect: the banks need funding from these investors and these investors need the banks to salvage the loans.

Expect somebody to become a billionaire figuring out how to unpackage these mortgages, individually work solutions out, and resell the stabilized loans.