Lita Epstein
JPMorgan Chase CEO Jamie Dimon was once a golden boy in Washington. After his bank emerged relatively unscathed from the subprime meltdown, Dimon was an enthusiastic supporter of the government's bailout plans. The lifelong Democrat was a member of Barack Obama's unofficial brain trust during the 2008 presidential campaign, and his name was even floated as a potential Treasury Secretary. In the thick of the financial turmoil in February 2009, President Obama held out JPMorgan as an example of a well-managed bank. hese days the praise on both sides has grown more restrained as the president and the banker clash over financial reform and foreclosure prevention.
The gloves came off entirely Tuesday in testimony before the House Committee on Financial Services. David Lowman, Dimon's lieutenant and the CEO of Chase's home lending, argued strongly against a cornerstone of the Obama Administration's plan to help homeowners facing foreclosure.
In his testimony (which can be read in its entirely in this pdf), Lowen sought to take the high ground in opposing the reduction of mortgage principal. "Like all loans, mortgage contracts are based on a promise to repay money borrowed," he said. "If we re-write the mortgage contract retroactively to restore equity to any mortgage borrower because the value of his or her home declined, what responsible lender will take the equity risk of financing mortgages in the future? What responsible regulator would want lenders to take such risk?"
I might even take him seriously, but what about all those commercial mortgages that are being written down? Why should commercial borrowers receive special treatment that home mortgage borrowers can't access? Even the Mortgage Bankers Association was able to work out a writedown deal to get out of a loan on a property that lost money.
It seems Dimon, whose bank has made it clear that principal writedown will not be considered, no longer fully backs President Obama. The bank, which has paid back its TARP bailout money, also seeks to derail financial reform and has spent $6.2 million on lobbying to try to minimize the impact of financial reforms. In his much-discussed annual letter to shareholders, Dimon complained that the credit card reforms alone will cost Chase between $500 million and $750 million in after-tax income.
On Wednesday, the JPMorgan Chase reported first quarter profits of $3.3 billion, a 55 percent jump from the same period last year. But the bank, said Dimon, suffered "high losses" in its consumer credit business, and set aside $3.7 billion to cover potential losses in its mortgage and home equity loan portfolios.
In addition to opposing principal writedowns, Dimon wants to stop the sweeping financial overhaul that could force Chase and other banks to shed assets and become smaller institutions. The new regulations will also tighten the grip both state and federal regulators have over financial institutions, possibly even setting up a consumer protection agency with wide-ranging powers.
For all of the bank's moralizing, that's not what's at issue here. It's the $448 billion in equity lines and other junior loans held primarily by the nation's four biggest banks. If principal writedown is allowed, most of the equity lines involved will be wiped out if the property is underwater. In fact, the plan Obama announced last week for owners of such homes allowed only 10 cents to 20 cents on the dollar for second-lien holders.
Right now second lienholders are holding up mortgage modifications for underwater homes. Yet mortgage experts clearly have determined that a borrower whose mortgage is more than 115 percent underwater will likely walk away from the home. If the borrower walks away, the first lienholder forecloses and the second lienholder gets nothing anyway.
So we're not talking about a moral issue, we're talking about reality. The big banks don't want to write down their losses until they absolutely have to. They would rather let homes go to foreclosure slowly -- collecting fees along the way -- than take a major writedown now. Never mind that most experts believe that principal reduction is the only solution to the foreclosure crisis.
This week's Congressional hearings will explore how equity lines and other junior liens are thwarting the mortgage modification process. But unlike past hearings, the government has one less cheerleader taking the stand.
Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Personal Bankruptcy and The 250 Questions You Should Ask About Avoiding Foreclosure.
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