JPMorgan Chase's Plan To Rescue Houses

This past week, JPMorgan Chase unveiled a new plan that halts foreclosure proceedings for ninety days. The move is expected to help as many as 400,000 families keep their homes. Economist Robert Litan from the Brookings Institution explains how the plan works to host Liane Hansen.

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From NPR News, this is Weekend Edition. I'm Liane Hansen. This past week, JPMorgan Chase unveiled a new plan. The bank will halt foreclosure proceedings for 90 days. The move is expected to help as many as 400,000 families keep their homes by modifying the terms of their loans. Joining us to talk about the plan is Robert Litan, a senior fellow in the economic studies program at the Brookings Institution. Welcome back to the show.

Mr. ROBERT LITAN (Senior Fellow, Brookings Institution): Thanks a lot.

HANSEN: Who qualifies for this program?

Mr. LITAN: Well, I think anybody facing foreclosure who's got a loan from JPMorgan that probably used to have a loan from Washington Mutual.

HANSEN: And how does it work?

Mr. LITAN: Well, I think, for those who are qualified, and I assume the bank is going to notify the homeowner, the bank will renegotiate the interest rate and/or the term of the loan and, I think, reduce the monthly payment to a level that's more in relation to the borrowers income than one that they can now afford.

HANSEN: Now, are there any other banks that are involved in any kind of similar initiatives?

Mr. LITAN: Not yet, although Bank of America, in buying Countrywide, inherited a lot of people that were facing foreclosure, and they were sued by a bunch of state attorneys general. And Bank of America settled that suit and, in the process, has agreed to a renegotiate lots of mortgages. And as we know, Wells Fargo has agreed to buy Wachovia, and Wachovia has a set of similar loans, very similar to those that Washington Mutual had. And so, I wouldn't be surprised if Wells Fargo is going to be either pressured or is going to feel compelled to do something similar now that JPMorgan has done it.

HANSEN: Why is this plan preferable to the bank over foreclosures?

Mr. LITAN: Foreclosure costs lots of money for the bank, and also, the bank has to hold the house for a while. It deteriorates. Nobody takes care of it. But even if they do keep it up, the neighborhood may have a number of other homes that are foreclosed, and the property values can sink .

And so the bank would rather avoid all the transactions cost and keep the current homeowner in the house and keep the payments going than probably undergo that expense. The only reason why the bank wouldn't do this and would want to go ahead to foreclosure is if they made a calculation, and somehow, they could get more back on the loan if they went on a foreclosure, and in some cases, that's probably true, but a lot of cases, it isn't.

HANSEN: Do you see any downsides to the plan?

Mr. LITAN: No. It's a win-win for everybody.

HANSEN: Robert Litan is a senior fellow at the Brookings Institution and vice president of Research and Policy at the Kauffman Foundation. Thank you.

Mr. LITAN: Thank you.

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