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Would you like your mortgage to be cut in half? Well, for many mortgage holders of  home loans held by Bank of America and JP Morgan Chase, it just might happen.  This week, the New York Times reported that these two banks, two of the country’s biggest lenders, are offering to modify home loans of certain borrowers even though those borrowers are current on their mortgage notes and have not asked their lender for any help.

Why are Banks Cutting Mortgage Amounts Without Being Asked To Do So?

It seems that Chase and Bank of America are combing through their mortgage loans, looking at those they deem to be “special risk,” and then they are taking it upon themselves to modify those mortgages.  It’s almost like a lottery-version of loan modification, because the homeowner isn’t involved in any of this process – the first they know about it is when they get an invitation to the mortgage-cutting party.

Remember, the homeowner here is current on his or her mortgage.  They’re making their monthly mortgage payments, these are not homeowners who are already behind in payments or facing a foreclosure.

Specifically, the banks are looking at Pay Option Adjustable Rate Mortgages and where the homeowner owes more on the note than their property is now worth according to current fair market values.  In other words, Pay Option ARMs on underwater mortgages are the ones that are getting reviewed by these two banks for special treatment.

Bank officials are telling the media that they are doing these unilateral loan modifications because they are trying to stop future foreclosures before they happen.  They are looking at these loans as being highly likely to be in default sooner rather than later, and they would rather help the borrower stay in the house than take the property.  They’re so happy to help that they’re cutting mortgage amounts – sometimes as much as cutting them in half.

Do you have the kind of loan that Chase or Bank of America Is Considering ?

Pay Option ARMs are notes where the borrower had the option of skipping the principal payment and some of the interest payment for a certain period of time at the beginning of the loan (usually a set number of years).  Those amounts were not forgiven; instead, that amount of monthly principal and interest not paid during that time period were added to the principal of the loan.

Most of these loans weren’t originated by Chase or Bank of America; instead, these two banks bought the notes from the lender(s) that initially lent the money to the borrower.  For example, Chase bought $50 billion in these Pay Option ARMs when Chase bought WaMu in 2008Bank of America took on over 500,000 of Pay Option ARMs when it took over Countrywide that same year.

According to media reports, the banks are looking at those Pay Option ARMs where the homeowner is underwater on their mortgage.  (The lenders are not forthcoming with details on what they are doing, including how they are choosing who gets their mortgage-cutting invitations.)

For those who have (1) a mortgage that is higher than the present fair market value of their home, i.e., “underwater“; and (2) a Pay Option ARM (as described above), you should contact your bank to negotiate one of these restructurings, using the Chase and Bank of America examples as a starting point for negotiations.  You never know in these crazy times, your bank may decide to cut your loan in half.

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