Posted by Leonard Steinberg on July 4th, 2011

Bank of America Corp and JPMorgan Chase & Co have started modifying tens of thousands of mortgages where the banks deem the loans especially risky, even if the borrowers have not asked, the New York Times reported yesterday.

In some cases, the banks are slashing the amount borrowers owe, citing one case in Florida where a woman’s principal balance was cut in half. The paper said the banks are targeting holders of pay option adjustable-rate mortgages, a type of loan where borrowers have the option of skipping some principal and interest payments and having the amount added back onto the loan.

Such “option ARM” loans were seen as especially high risk in the wake of the financial crisis; the two banks collectively still have tens of billions of dollars of such loans in their portfolios. One law professor quoted by the Times said the banks were behaving in contradictory ways, modifying some loans that should not be and not modifying some loans that should be.

Would it not be smarter for banks to evaluate each mortgage on a case-by-case basis, and make adjustments to that mortgage in the hopes of the borrower being in a better position to continue paying down that mortgage without defaulting? Surely much more time and cost is incurred when a foreclosure takes place, and surely those foreclosures further de-value surrounding properties thereby making the owners of those properties more at risk to default?

Maybe I am over-simplifying this, but a few years ago I provided a 2nd mortgage to a friend. He only needed the ‘loan’ for a few months. The loan was at a high rate of 12%. Then the financial storm hit and he could not pay down the loan. I recently halved the interest to 6%, thereby allowing my friend to have the additional money he would have paid to me to do repairs to the property. Now apply this same philosophy to banks and it becomes clearly evident that money forced into the hands of banks and corporations does not necessarily fuel the economy (It certainly has not fueled job growth!). Putting the cash into the hands of the (responsible) consumer fuels spending, the ultimate driving force of this economy.