Why Citigroup and JPMorgan are freezing foreclosures

Citigroup Inc. (NYSE:C) and JPMorgan Chase & Co. (NYSE: JPM), two of the largest mortgage holders, announced they would temporarily freeze foreclosures as the Obama administration prepares to unveil a new policy to keep financially stressed homeowners in their homes.

The banks are not doing this to be good corporate citizens, though they would probably argue otherwise. Foreclosures are bad for business. Companies have to write down the values of the bad loans. Then there are the legal fees associated with foreclosures, a process which can drag out for several months. Banks also need to hire people to maintain the vacant property and to try and sell it.

At the end of the day, the mortgage companies will probably lose money. Until the recent credit crunch, some mortgage companies would bend over backwards to help delinquent borrowers to avoid having to pay the costs associated with foreclosures. During congressional hearings this week, financial services CEOs touted their programs to work with distressed homeowners.

Clearly, more needs to be done. Obama's plan is expected to include the use of government money to lower interest rates. With unemployment hitting 7.6 percent, it remains to be seen whether these homeowners can afford even the cheaper rates.

Foreclosure filings soared by more than 80 percent last year. Consumer groups such as the Center for Responsible Lending advocate allowing bankruptcy judges the ability to modify mortgage contracts. This may be part of Obama's new policy which bankers have long opposed.

"We remain opposed to bankruptcy cram down legislation because of the destabilizing effect it will have on an already turbulent mortgage market," the Mortgage Bankers Association said in a recent statement. "We were surprised by the suddenness of the announcement and are still evaluating the proposed deal, but we believe there remain a number of crucial issues that need to be addressed."

The Center For Responsible Lending counters that bankruptcy judges should have the ability to rewrite terms of mortgages on primary residences because it does not cost taxpayers a dime, said Kathleen Day, a spokeswoman, said in an interview Plus, judges have this authority with other types of properties.

Nonetheless, the group which is often critical of banks was pleased by the Citigroup and JP Morgan foreclosure freezes.

"We welcome every little bit of help," she said.
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