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A Bitter Pill For Mortgage Borrowers

An expensive federal rescue plan has been keeping costs down for banks and wealthy customers while delaying the bitter pill of foreclosure for the most troubled borrowers.



) -- Top banking executives said this week that it may take years for the country to see a full-fledged housing recovery -- and that a government rescue program may actually be hindering progress.

The housing market recently began another leg down, despite hopeful signs last year after the Obama administration rolled out its "Making Home Affordable" program. Home sales have dropped dramatically since some incentives expired in April. Despite homes being more affordable than ever, demand has been feeble, prices remain soft and there's more than a year of supply on the market.

The latest sign of weakness came Wednesday, when the Mortgage Bankers Association said applications had fallen for the second week in a row. Though mortgage rates remain at historic lows, refinancing requests dropped 11%. Though home prices are still deeply discounted in many regions, applications for new purchases also fell marginally.

At an event this week,

Bank of America

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CEO Brian Moynihan estimated that it will take the bank another three years to work through its 1.5 million "seriously delinquent" borrowers. Jamie Dimon, who heads rival mortgage lender

JPMorgan Chase

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, said federal initiatives have simply delayed the inevitable for many borrowers.

"We have been writing off foreclosures that are delayed because of HAMP," said Dimon, referring to the government's Home Affordable Modification Program. While the initiative has "reduced

foreclosures a little bit," he added, "we think it is going to go back up to where it was."

The federal government has been attacking the mortgage crisis on several fronts -- targeting an interest rate of zero; extending $75 billion in workout-plan incentives; funneling special money to the "hardest hit" states; and encouraging more "dignified" means of exiting unsustainable mortgage debt -- such as short sales or deed-in-lieu transactions -- since a foreclosure moratorium was lifted earlier this year.

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But while homes have become more affordable and more available than ever before, only a select group of borrowers have benefited from the enormous amount of federal spending.

Banks have been targeting affluent borrowers for new loan originations, while low funding costs have helped pad their bottom lines. Meanwhile, the troubled borrowers targeted by the rescue initiatives have become a cost burden that the industry can't shake and the government can't seem to help.

Moynihan described the mortgage business as "a tale of two areas."

Bank of America has hired over 20,000 associates, as well as outside contractors, at a great expense to manage through the rest of its troubled mortgage debt. The bank is largely grappling with troubles from vintage loans originated by Countrywide in 2005 to 2007. Moynihan said that that BofA has made progress on working through a tidal wave of modification requests and customer complaints, but predicted more pain ahead.

"My view is this will be manageable over time, but it has cost us a lot of money," said Moynihan, pointing to Bank of America's remaining $8 billion in mortgage reserves.

Yet at the same time, BofA is seeing a high volume of new originations to affluent borrowers, with attractive spreads and few defaults. While there are still issues with the mortgage book, the bank was able to release $1.45 billion in reserves from its overall loan portfolio last quarter.

Dimon also indicated that the mortgage-mess is far from over. He noted that the bulk of home-equity loan charge-offs are yet to come, and predicted the industry may experience repurchase requests from

Fannie Mae



Freddie Mac


through 2013.

"When I look at all the

mortgage stuff, we have kind of got our hands around it," said Dimon. "It is taking a while and to me, when there is a recovery, unemployment comes down, this will hopefully get better."

For the most troubled borrowers, though, things have gotten worse.

Nearly 630,000 borrowers who accepted HAMP modifications have canceled them - far more than 422,000 who stuck with permanent workout plans. While 45% have moved into alternative modifications offered by servicers, about 17% have faced foreclosure, short sales or deed-in-lieu transactions. Another 30,000 borrowers were either denied a modification or canceled the program because they filed for bankruptcy.

Fierce economic challenges have rendered many mortgage solutions Band-Aids for far bigger issues.

Some borrowers have seen income levels drop because of the extended period of unusually high unemployment. Others who bought at the height of the market are stuck with loans that are worth much more than current values - effectively making modifications unfeasible. In the worst-hit states, 30% to over 50% of homes are underwater.

Foreclosures have recently started to tick up again, with

338,836 properties receiving notices last month, according to RealtyTrac. Filings rose at a monthly rate of 4% in both July and August. Over 5 million homes have received notices since "Making Home Affordable" first got off the ground in the spring of 2009. The trend seems to ebb and flow with various federal initiatives and their expiration.

The government has tried to heap blame on the banking industry for delays in helping homeowners - much of it deserved. Yet it also broadcasts the 1.3 million HAMP trial modifications that have been extended without pointing out the many that have failed. And with taxpayers starting to notice the gigantic losses piling up at Fannie and Freddie, the government is also

trying to push back billions of dollars' worth of mortgage debt to the servicers from whence they came.

As America's mortgage reckoning progresses, regulators, taxpayers and homeowners may eventually have to swallow a bitter pill of truth: Many troubled loans can't be worked out and will be sustaining losses, possibly for years to come. Hundreds of billions of federal dollars have been spent to keep funding costs low for the banking industry and its wealthiest clients, but can't do much to rescue troubled borrowers who are in over their heads.

Howard Atkins, CFO of the country's second-largest mortgage servicer

Wells Fargo

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, noted that 30-year fixed mortgage rates are now tracking a full percentage point below the average rate in Wells' broader loan portfolio.

"Any homeowner that can refinance a mortgage loan should do so," said Atkins. "Even if that cash-out is relatively nominal," he added, "the wealth effect of this potential refi boom, in our view, is quite substantial."

--Written by Lauren Tara LaCapra in New York.

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