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JPMorgan Chase


executive made a tacit admission before Congress on Tuesday: Employees "may have" signed affidavits without personally verifying the information.

But, he added, the underlying borrowers had defaulted on the loans after extensive efforts to make payments more affordable - and, at the end of the day, bank employees are only human.

>>>Foreclosure Crisis: What Bank Execs Say

"We do not engage in a foreclosure sale if the modification succeeds or until the modification process fails," David Lowman, who heads JPMorgan's mortgage division said in prepared testimony before the Senate Banking Committee. "That is not to say we are perfect - we service millions of loans, and we sometimes do make mistakes. But when we find an error, we fix it."

When a borrower becomes seriously delinquent, most major servicers must try to put the loan through the Home Affordable Modification Program (HAMP) program. In many cases, borrowers aren't eligible due to program restrictions and lenders try in-house alternatives.

If that doesn't work, there's a last-ditch effort to engage in a short-sale or deed-in-lieu transaction before foreclosure proceedings commence. In judicial states with the most restrictive laws, foreclosure can take nearly two years to complete, from start to finish, while borrowers remain in the homes.

The Senate committee is holding a hearing on "Problems in Mortgage Servicing From Modification to Foreclosure." Lowman was called upon to offer a mortgage-servicer's point of view. The hearing came on the same day as a

Congressional Oversight Panel report on the issues big banks are facing with foreclosures and mortgage-repurchase requests.

The executive detailed Chase's efforts to rectify delinquent loans. He outlined the millions of calls, mailings, visits and messages fielded by Chase employees in an effort to reach out to struggling borrowers. On average, he said, the bank contacts a borrower over 100 times before a foreclosure is completed.

When putting a borrower through HAMP, Chase first tries to adjust monthly payments to 31% of a borrower's total pretax income. The bank has reduced interest rates to as low as 2%, extended loan terms by 10 years or deferred a portion of principal, interest-free, until the loan is paid off.

But while Chase has sent out 900,000 offers for HAMP modifications, only 6.6% of those borrowers have made it into "permanent" modifications. Like competitors, the bank seems to have had more success with proprietary workout solutions.

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Chase has automatically locked rates on the subprime adjustable-rate mortgages (ARMs) it owns to the initial rate in order to keep payments affordable. For loans it services, but doesn't own, Chase has used a standard industry program called "Fast Track" to lock rates for five years.

Chase has also also modified "option" ARMs it acquired from Washington Mutual, under whose terms subprime borrowers were able to choose their own initial payment levels. The bank changed terms to a fixed rate that's more affordable than balloon payments that eventually would have exploded in borrowers' faces. The company has eaten $8 billion in principal balance through these modifications since the start of 2009.

In other cases, the bank does an analysis similar to HAMP's, testing different scenarios that would both make the loan affordable and make it profitable for Chase. It offers to reduce payments anywhere from 31% of income to 40% of income, depending on the borrower's finances.

Still, says Lowman, "despite our best efforts, not every loan can be modified, for a variety of reasons." One of the key reasons is that a servicer's duty is to mortgage-bond investors - not to homeowners.

Chase and other servicers are under a contractual duty to maximize the return on investment; foreclosure comes only when there's little chance a loan can be modified profitably. Even lenders that retain mortgages on balance sheet must ensure that loans remain profitable.

"Modifications that do not maximize the return to investors are inconsistent with our duties as servicer," said Lowman. "And even aside from our contractual duties, the U.S. mortgage market will never return to health if investors come to believe that the value of the collateral is unreliable."

In regards to the foreclosure-affidavit issues, Lowman evoked a sentiment similar to that of his boss,

JPMorgan CEO Jamie Dimon, and other top bank officials. He was firm about whether Chase was correct in foreclosing upon the properties, even if there were documentation errors. He noted that in Chase's average foreclosure case, the borrower hasn't made a payment for 14 months and that "significant" portion of the homes are vacant or not primary residences for the borrowers.

"The issues that have arisen in connection with foreclosure proceedings do not relate to whether foreclosure proceedings were appropriately commenced," said Lowman. "We have not found errors in our systems or processes that would have led foreclosure proceedings to be commenced when the borrower was not in default."

Nonetheless, JPMorgan did halt foreclosure proceedings in 23 judicial states because of the robosigning scandal.

"Our process was not what it should have been," said Lowman. "Quite simply, it did not live up to our standards."

-- Written by Lauren Tara LaCapra in New York


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