Option ARM Borrowers Get Unsought Assistance

While millions of homeowners are in foreclosure, struggling to keep their homes and getting little help from their lenders, tens of thousands of borrowers who have not even asked for help are getting their debt reduced.

Bank of America and JPMorgan Chase, two of the nation’s biggest lenders, are quietly modifying loans and easing the mortgage terms for borrowers who are not even in default, but are among the many home owners the banks deem to be at special risk.

Borrowers with an option ARM loan are the home owners the banks are targeting at special risk. The pay option adjustable rate mortgages, with their low initial payments and “teaser” interest rates, which were extremely popular in the late stages of the housing boom, are now viewed as potentially troublesome. As a result, the big banks have been proactively overhauling the mortgage loans for these home owners and in effect paying the debt these owners accrued as the housing market plunged.

When Bank of America and JPMorgan Chase bought troubled lenders during the housing crash they inherited their portfolios of option ARMs. Option ARM loans gave borrowers the option of skipping the principal payment and some of the interest payment for an introductory period of several years. The unpaid balances would be added to the body of the loan. The problem with these “Nightmare Mortgages” as they were called in a 2006 Business Week cover-piece, is that eventually the interest rate would reset or the loan balance would have to be paid in full.

Bank of America spokesman, Dan B. Frahm, said the bank was using every technique short of principal reduction to remake its loans, including waiving prepayment penalties, refinancing, lowering the interest rate, postponing some of the balance and extending the term.

“By proactively contacting pay option ARM customers and discussing other products with better options for long-term, affordable payments, we hope to prevent customers from reaching a point where they struggle to make their payments,” Mr. Frahm said.

This proactive assistance for borrowers who might get in trouble is in sharp contrast with the banks efforts toward those already foreclosed. In fact, Bank of America and Chase were penalized last month by regulators for doing a poor job modifying mortgages in default.

Debt forgiveness and the moral hazard question of who deserves to be helped are one of the most contentious issues being addressed between the big lenders and the nation’s attorneys general regarding foreclosures. The banks say cutting mortgage balances would be unfair to borrowers who remain current as well as impractical because so many loans are securitized into pools owned by investors.

According to Georgetown University law professor Adam J. Levitin, these little-publicized programs were more evidence that the banks were behaving in contradictory and often maddening ways. “Loan modifications that should be happening aren’t, while loan modifications that shouldn’t be happening are,” he said. “Homeowners of any sort, whether current or in default, would rightly be confused and angry by this.”