Banks' Loan Modification Programs A Byproduct of Capital Purchase Program?

On Monday, Citigroup announced (here) a $20 billion mortgage loan workout program.  This follows on te heals of a similar announcement (here) on November 1 by J.P. Morgan that it would also restructure mortgage loans held by Washington Mutual, which J.P. Morgan acquired when Washington Mutual failed.  Only loans that are owned outright by the banks are typically eligible for the programs.  Each bank is a loan servicer for billions of dollars worth of other loans that are owned by trusts and investors in mortgage backed securities.  Because loan modifications affect the payouts to investors in these securities, investors would likely have to approve modifications of loans for which Citi and J.P. Morgan are servicers rather than owners of the mortgages outright.

Both Citi and J.P. Morgan have stated that these loan modification programs are not the result of government pressure, but instead make good business sense.  Foreclosure, they say, is an expensive way to collect on the loans, particularly because selling repossessed houses in the declining housing market makes it difficult to get decent value on the sale.

Although the banks say it makes good business sense, it is interesting that the announcement of these programs comes on the heels of the banks' participation in the TARP Capital Purchase Program.  Each bank was one of the original nine participants in the program when it was announced.  And last week, the Treasury posted the master securities purchase agreement for the government's investment in these companies.  As set forth in my last post, the securities purchase agreement provides that the participating company will "work diligently, under existing programs, to modify terms of residential mortgages as appropriate to strengthen the health of the U.S. housing market."

It is expected that Fannie and Freddie will announce a similar loan workout plan today, as reported in the Wall Street Journal (here).

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[beachdude]

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lowering the mortgage interest rate
reducing the mortgage principal balance
fixing adjustable interest rates within the mortgage
increasing the loan term throughout the mortgage
forgiveness of payment defaults and fees
or any combination of the above

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