Banks Commence Wholesale, Unsolicited Mortgage-Debt Forgiveness

Tyler Durden's picture

It was just a matter of time before wholesale debt-forgiveness became the primary source of wealth in the US. The time is now. The NYT reports that "big banks are going to borrowers who are not even in default and cutting their debt or easing the mortgage terms, sometimes with no questions asked. Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk." To be deemed in "special risk" one needs to simply have an Option ARM mortgage, and be underwater, even if still current on mortgage payments. End result: an up to 50% cut in the actual mortgage obligation. To wit: "Ms. Giosmas, who lives in Miami, was not in default on her $300,000 loan. She did not understand why she would receive this gift — although she wasted no time in taking it. Before Chase shaved $150,000 off her mortgage, Ms. Giosmas owed much more on her place than it was worth. It was a fate she shared with a quarter of all homeowners with mortgages across the nation. Being underwater, as it is called, can prevent these owners from moving and taking new jobs, and places the households at greater risk of foreclosure." Whether this is a strategic step by the banks who wish to avoid tens if not hundreds of billions in fraudclosure and putback related legal costs, charges and reserves is for now unclear, although all signs point to yes. Next up: everyone in America stops paying their mortgage, or demands a 50% haircut on existing debt, now that the example has been made. And in the meantime, banks will somehow continue to keep the mortgages, which they have now cut by up to half, at par on their books following some brand new, thoroughly senseless announcement by the FASB which says banks can mark anything to whatever price they chose in perpetuity. Because otherwise, the TBTF lenders will suddenly find themselves in a massive deficiency on their Tier 1 capital, also known as completely insolvent.

More from the NYT:

“I used to say every day, ‘Why doesn’t anyone get rewarded for doing the right thing and paying their bills on time?’ ” said Ms. Giosmas, who is an acupuncturist and real estate investor. “And I got rewarded.”

Option ARM loans like Ms. Giosmas’s gave borrowers the option of skipping the principal payment and some of the interest payment for an introductory period of several years. The unpaid balances would be added to the body of the loan.

Bank of America and Chase inherited their portfolios of option ARMs when they bought troubled lenders during the housing crash.

Chase, which declined to comment on its program, got $50 billion in option ARM loans when it bought Washington Mutual in 2008. The lender, which said last fall that it had dealt with 22,000 option ARM loans with an unpaid principal balance of $8 billion, still has $33 billion of them in its portfolio.

Bank of America acquired a portfolio of 550,000 option ARMs from its purchase of Countrywide Financial in 2008. The lender said more than 200,000 had been converted to more stable mortgages.

More details on the example that prompted the NYT article:

Ms. Giosmas bought her two-bedroom, two-bath apartment north of downtown Miami for $359,000 in early 2006, according to real estate records. She made a large down payment, but because each month she paid less than was necessary to pay off the loan, her debt swelled to about $300,000.

Meanwhile, the value of the apartment nosedived. By the time Ms. Giosmas got the letter from Chase, the condominium was worth less than half what she paid. “I would not have defaulted,” she said. “But they don’t know that.”

The letter, which Ms. Giosmas remembers as brief and “totally vague,” said Chase was cutting her principal by $150,000 while raising her interest rate to about 5 percent. Her payments would stay roughly the same.

A few months ago, Ms. Giosmas sold the place for $170,000, making a small profit. Having a loan that her lender considered toxic, she said, “turned out to be a blessing in disguise.”

And so America is now well en route to another spike in class warfare tensions, as has been the default case for the past two years between those who act in a prudent financial way, and everyone else, who are now getting bail outs from the same banks that were bailed out by those stupid enough to pay US taxes in the first place:

The banks say cutting mortgage balances would be unfair to borrowers who remain current as well as impractical because so many loans are securitized into pools owned by investors. Bank of America’s chief executive, Brian T. Moynihan, told the attorneys general in April that cutting principal for current borrowers would send the wrong message to all those who have struggled to pay their bills. His counterpart at Chase, Jamie Dimon, bluntly said it was “off the table.”

Having an option ARM loan, however, apparently qualifies the borrower for special help. The loans, with their low initial payments and “teaser” interest rates, were immediately popular with buyers who could not afford or did not want to pay the soaring prices on houses. The problem was, eventually the rate would reset or the loan balance would have to be paid in full. “Nightmare Mortgages” they were called in a 2006 BusinessWeek cover piece.

Lastly, to all those who were predicting an Option ARM housing market collapse once loans go from Adjustable rate to fixed, the banks now have an answer.  And it is wholesale mortgage debt reduction.

Option ARMs were never quite as bad as predicted, partly because the crisis pushed down interest rates so far that the resets were relatively mild. Many owners did default on them, but others, like Ms. Giosmas, were quite happy to pay less for years than they would have under a conventional loan. She used option ARMs on her investment properties too.

“They saved me,” she said. “Why would I want to pay a lot more every month? I’d rather have it in my pocket.”

Not surprisingly, this will be the same rhetorical question posed next by everyone who still has a mortgage, and not only by those, roughly 28% of all, who are underwater on their mortgage. Which means that wholesale mortgage reduction for everyone in America is next on the docket. Which also means that the "rent" component of personal income is about to surge from the current $50 billion annualized to well into the triple-digits, or about 1-2% of GDP, just enough to offset recession yet again.

And that's how you create wealth in the modern, centrally-planned USSA.

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Mr. Anonymous's picture

Maybe I'm stupid for thinking Ms. Giosmas is an idiot, but doesn't that 'forgiven' 150,000 loan go from likely being a 'no-recourse', or at least bankruptcy dischargeable debt to a private bank, to an unexpungeable, debt slavery bond to the United States treasury via the IRS?

Isn't this how 'forgiven' debt is treated in US tax code?

glenlloyd's picture

Well they aren't doing this out of the kindness of their hearts, there is some other underlying motivation and it could very well be conversion of non-recourse to recourse loans.

I would be very leary of anything rewritten voluntarily by tbtf banks.

Herbert_guthrie's picture

I agree.

Either misdirection play or squeezing out a few more dollars from the hopeful before foreclosure?

random shots's picture

Loans that are seeing principal reductions, like the one in the NYT article, have already been written down to "Fair Market Value" when they were first acquired. So a $500K outstanding loan was written down to $350K for reporting purposes.

However, they still required the owner to pay the $500K loan. Banks are now providing principal reductions to owners because they figure they can no longer milk the borrowers who are current (default risk is rising).

They offer principal reductons to owners to keep them chained to their mortgages. Banks get good PR from the sheepies without having to take additional writedowns

Burnbright's picture

Ding Ding, we have a winner. Also as stated above I imagine it has to do with rewriting a contract so that it makes better terms for the bank.

chumbawamba's picture

Agreed.  And also, this gets everyone's mind off the foreclosure fraud debacle.  I guess now we'll forget that our homes are hopelessly encumbered by fraudulent securitization and we'll just go on pretending that it'll all work out because we have title insurance.  The banksters start handing out candy and everyone swoons.

You know, if people wised up we could turn this scam around on the banks.  If we formed large unions amongst mortgagees based on originating bank and then agreeing to go on a payment strike until more candy was dispensed, we might actually be able to turn the tables.  We could be like sluts leading the banks around by their horny cocks, telling them they can't bend us over until they give us some candy.


I am Chumbawamba.

Troll Magnet's picture

I'm a little confused by this part in the article:

Ms. Giosmas bought her two-bedroom, two-bath apartment north of downtown Miami for $359,000 in early 2006, according to real estate records. She made a large down payment, but because each month she paid less than was necessary to pay off the loan, her debt swelled to about $300,000.

So, if your monthly payment is say $1,000 but you pay $500, do banks still consider you "current" on the loan? 


Bicycle Repairman's picture

"said Ms. Giosmas, who is an acupuncturist and real estate investor."

So we're bailing out real estate investors now, are we?  And who do I mean by 'we'.  Why I mean taxpayers and savers.

The banks should have gone under and MsGiomas should have coughed up the property directly to the market place.  Fuck this.

Thorny Xi's picture

And those of us who paid cash for our homes after 2002?  Or paid off mortgages?  Who find our property reassessed for 50% less than it was "worth" last year?  Where's our check from the government, FASB, a bank or somebody to make US "whole?"


F this!



Popo's picture

It's too late for you.   But for those who still have a mortgage, the lesson is clear:   Stop paying.   Now.

Troll Magnet's picture

I understand your underlying sentiment but I cringe whenever someone says "Stop Paying Now" because you're basically telling mortgage holders to take a gamble that they will somehow be forgiven and come out alright when in fact they could lose their homes, credits destroyed, lives ruined, etc, etc. 

nope-1004's picture

You should change your name from Troll Magnet to "Scared Bankster Troll".  Appreciate your bankster insight, but the truth is everyone needs to stop paying their mortgage, now!  The bait and switch they are pulling by further entrapment of those that have a mortgage is clear.

Remove the chains people.  Rid the banks of their grip on you and STOP paying your mortgage.  A precedent has been set.

The outcome will be a new market, clean, no bank manipulation, with no more phony funny money games.

What does it all mean's picture

1.  The timeline on this story is old.  it is back in 2010, or before.

2.  This could very well be a planted story in NY Times to prevent the housing from totally collapse...  (Except that it might have the opposite effect and it might just collapse anyways.)

3.  Have you guys ever though that this could be a disinformation tactic set up by the banks?

Troll Magnet's picture

Yeah, that is IF you can get every single homeowner with a mortgage in America to Stop Paying Now.  Keep dreaming.

I have a home with a fair amount of equity in it and I also have a mortgage.  I guess I can Stop Paying Now just so a bunch of anti-banksters (myself included) can pat me on my back and tell me that I did the right thing but will you compensate me if I lose my house? 

Popo's picture

Bad credit does not equal "lives ruined".  

Don't forget:  The banks ***DESPERATELY*** need you to borrow.   Without you borrowing,  there are no banks.

Let them tell us all we have "bad credit".

Then what?

Troll Magnet's picture

In a perfect world you can enlighten everyone and get every single person to revolt against these criminals but that's not the world we live in.  Those who are casually telling people to just stop paying mortgage is basically telling people to jump out the window and see if you can land on your two feet. I mean, shit, you're talking about people's wealth here.  Some, myself included, have equity and money invested in our homes.  You think people like me are willing to take a gamble that my not paying mortgage will pay off in the end?  You're dreaming. 

Until I see banksters in handcuffs and laws being enacted to ameliorate this fucked up situation, I'm taking no chance that's going to cost me my home. 

trav7777's picture

what about those of us who GTFOd and now rent?

Where the fuck is MY check?

Bananamerican's picture

same here...

we sold and took our chips off the table in late '06.

This would still have the effect of lowering prices though wouldn't it?

Lawd knows we've been waiting for supports to get kicked out....


Careless Whisper's picture



OK there's 347 comments here right now and I haven't read any of you drama queens do the simple math. Enough with the MERS and who owns my note routine. This re-fi from Chase is very simple. Completely done to benefit Chase. The lady had an option arm; she was paying 1% interest, with the rest of the interest - probably another 6%, being accrued and added on to the principal - negative amortization as they say. After 5 years she would owe about $390,000 on her $300,000 mortgage. Her condo currently being worth $150,000; who knows what it will be in 5 years. At that point she mails the keys to Chase. Instead of receiving 1% per year on $300,000 in interest ($3,000), Chase now gets 5% on $150,000 ($7,500) and no foreclosure and the loan stays performing. Plus the new loan docs will be more legit as Chase has discontinued using MERS entirely.


swmnguy's picture

You win some sort of prize.  A calculator or something.  Thanks for stating that clearly.  I hadn't quite figured out where the hook was yet.

tip e. canoe's picture

principal goes down

but above water, interests

Chase free money yo

Attitude_Check's picture

You "win" as the prices of housing accelerates downward.  Did you see she sold her property for $170K after the mortgage principle was dropped.  Now imagine the downward pressure on housing prices if this becomes wide-spread.

dark pools of soros's picture

anyone with a clear titled, fixed rate loan won't get anything either - don't be surprised, this is the era of gamblers never lose and playing safe costs twice as much

csmith's picture

Exactly. This is simple damage control on the craziest loans with open-ended losses attached. Pick-a-pay borrowers who simply say 'tack it onto principle" every month are essentially INCREASING their loan amount each time they do so, and the eventual loss.

foofoojin's picture

you showed that loss on your taxes? right? spead the lose out over several years? right? right?


Anonymouse's picture

Exactly.  I paid off my mortgage in 2008, as I made my personal balance sheet even more conservative than it had been.  What a fool I was.  It never occurred to me that all I had to do was increase the risk to get a substantial portion forgiven.

Solarman's picture

It was a neg am loan which allowed her to pay less than she owed.

MIDTOWN's picture

The banks were offering interest only lines of credit secured against the real estate, I opened a 10 year interest only line to purchase a condo. This was a great vehicle for investors to acheive positive cash flow.  When prices began to fall, I sold the condo. This type of loan is a huge risk in a declining market.

piceridu's picture

It's called a pick-a-pay can choose as one of the options to pay a neg am and the neg am gets added to your principle amount each time you choose that pay option.

cranky-old-geezer's picture

If the borrower is payng less than the interest, the unpaid interest is added to the principal balance.

Say a mortgage payment is $600.  At this point in the loan monthly interest on the current balance is $500 with $100 going to principal. 

But the loan allows a lower monthly payment in the first 3 years, say $300 for example.

The $300 payment all goes toward interest, leaving $200 interest unpaid.  The $200 unpaid interest is added to the principal balance.

FEDbuster's picture

The ability to pay a partial or no payment at all was one of the selling points of the "Option ARM".  It was truly one of the craziest mortgages during the height of the boom.  Negative amortization made it illegal in some states. 

What we need to be fair is a massive debt "Jubilee", in which all debts in society are eliminated.  Not these one off gifts to certain mortgage classes.

tip e. canoe's picture

i prefer the term "self-organized collective of autonomous individuals" over "union", but that's a spectacular idea.

Americons love KANDEE, you know.   i want mine in root beer barrels.

Milestones's picture

Frankly, I'm kinda caught out here in left field and need some help or some one else does. As I see it there are two totally seperate problems involved in this whole scum bag mess. One the problem with the MERS involvement in the individual contracts and the other being the issue of securitaziation of this said contracts. The questionable actions of MERS which is a state issue as these individual contracts are a state action via county jurisdiction and the and the issue of rolling into large commercial papers and sold under the watchful (ha) eye of the SEC, a Federal agency as well as all the ABC  agencies of the Federal gov'n.

One, How in the hell are all these apparent air head State A.G.'s going to settle anything in the name of the individual property owner in their state? Article ! Section 10 (1) says Powers denied individual states. (1) No state shall enter---pass any bill of attainder or ex post facto law, or law impairing the obligation of contracts---.

In a word, if I wish to tell my mortgagee to go pound sand the D.A. has no authority to bind me; it is a contract. Further, if these people who are holding this securitized bundle of mortgages or the sellers of those securitized notes don't have my promissary note, no-one can forclose on me and they can all get fucked.

It sure strikes me that these large banks have some very large problems that this little gimmick plan is nothing more than puff the magic dragon dressed up in a pin stripped suit.

Maybe I'm kinda dumb and am tracking this wrong, but I think I'd have to tell some one to show me a lot more than what I've seen.       Milestones


MachoMan's picture

I'm going to make this as clear as I possibly can and hopefully no one else revisits the issue again, ever...  The state A.G.s can only bind their respective states to an agreement and NOT you.  As a result, in general, your vested rights cannot be effected.  One notable exception is with procedure...  they can change the laws for how a particular cause of action is brought or, alternatively, when a right to bring a cause of action accrues...  I'm having a hard time picturing any scenario in which said exception could be utilized in any material manner for mortgagors.

FreeNewEnergy's picture

Milestones, your'e dead on. Banks are desperate, but this latest maneuver was designed to just keep suckers paying. There's blood in the water and sharks are circling...

Mentaliusanything's picture

Yes - Banks bending over to help the little people. Please


as a little robot was want to say

"warning Will Robinson Warning"- its all to much really!!!!!!!!

BTW congrates Chumba ya survived 1 year and 52 weeks (WTF) 

Oh well ----- Happy fucking 2nd Birthday from Auzztrralia 

Urban Redneck's picture

Doesn't BofA have a loss sharing agreement with the US government- so the government will make BofA whole on the initial write down amount, and BofA then gets a new length of rope with which to re-bond the debt slave (absent any of the MERS sideshows)?

random shots's picture


Wholesale debt forgiveness has been going on since at least 2009. Nothing new other than Zero Hedge is now getting around to talking about it.

"Wells Fargo Cuts as Much as 30 Percent in Principal" (Dec 2009)

bankonzhongguo's picture


I have yet to meet, hear or otherwise see any document related to California principal write-downs or a mortgagor.

Its like the Easter Bunny and Sasquatch.

If its everywhere, then please point to a link on the Wells Fargo website.

Not some plant story in Bloomberg or the NYT.

My best friend is in it deep with Wells Fargo for months on Merced County property. 

No discussion of mortgage reduction whatsoever.


random shots's picture

Because Tyler has blown this story out of proportion. Tens of thousands of principal write downs (from the NYT article) versus 11 million mortgages underwater (CoreLogic data) is at most 1% of loans being modded.

As for Wells, google Wachovia MAP loan mods to see people discussing principal reduction offers.

Widowmaker's picture

I agree.

What is the big secret?

Money for nothing -- now that's a laugh. 

To all those that were bailed out, including the unsuspecting - YOU'RE FUCKING WELCOME.

Meanwhile, the rest of us pay taxes on top of taxes...

Where's my $150k bonus for a bank's speculative failures?!

FEDbuster's picture

If you are in the AZ legislature, and you can drop a bill that would make it harder to foreclose on citizens of your state, then the banksters will cut your mortgage in half:

Coke and Hookers's picture

Exactly. The banks calculate how much writedown they need to 'give' to keep people from defaulting. This is the equivalent of a plantation owner increasing the food ration just enough to keep the slaves from revolting or running away. The plantation ain't gonna manage itself.

Mr. Anonymous's picture

Oh, you can bet your bippy these are going from no-recourse to recourse, that's the minimum in the poker game.  But I think foolish, imprudent people like Ms. Giosmas are gonna find a fat tax bill to go with their new no-recourse debt.

A Man without Qualities's picture

Doesn't the loss on the property offset the gain on the loan?

graspAU's picture

IMHO - From the borrower's perspective the debt forgiveness is a gift in the year it happened. A loss on the property would only happen when you sold and moved out. Lots of people will stay. 

sleepingbeauty's picture

She did sell hers, but I am with you that many won't.

A few months ago, Ms. Giosmas sold the place for $170,000, making a small profit. Having a loan that her lender considered toxic, she said, “turned out to be a blessing in disguise.”

I never did get that about the states. If you get a loan amount forgiven for any reason, it is considered income. So when you go into bankruptcy or credit proposal or whatever it is called you have to default for more than needed to pay the IRS at the end of the year.

Boop's picture

Not in the case of bankruptcy - at least in the situation where the debt is discharged rather than defaulted upon.

eaglefalcon's picture


I never did get that about the states. If you get a loan amount forgiven for any reason, it is considered income. So when you go into bankruptcy or credit proposal or whatever it is called you have to default for more than needed to pay the IRS at the end of the year.



That is technically not correct.  The forgiven debt is only taxable TO THE EXTENT MS GIOSMAS IS SOLVENT at the time of the forgiveness.  Let's say, before the bank forgives some of her mortgage debt, Ms Giosmas owes the bank 300K, and the house sells for 170K in a fair market, and Ms Giosmas owns 30K in bank deposits and other assets, she is INSOLVENT by

170K + 30K - 300K = -100K

Now let's say the bank forgives half of Ms Giosmas' balance, which is 150K.  Now Ms Giosmas' net worth becomes positive, and she is SOLVENT by 50K (150K -100K = 50K).  Therefore she needs to pay IRS tax on part (50K) of the forgiven debt instead of the whole amount (150K)

However, Ms Giosmas real financial situation is probably not as rosy and described above.  Let's say she owes 30K of medial bills and 21K credit card debt.   Then even after the forgiveness she is INSOLVENT by 1000 dollars.  In that case, she doesn't have to pay any income tax at all on the 150K wirte-off

She needs to file Form 982 (Reduction of Tax Attributes) with IRS.  Tax attributes is sort of like tax credit but much more complicated.  But since Ms Giosmas like most people doesn't have any tax attributes anyways, she doesn't lose anything on that deal

Bicycle Repairman's picture

"But I think foolish, imprudent people like Ms. Giosmas are gonna find a fat tax bill to go with their new no-recourse debt."

Foolish and imprudent?  She may have been foolish and imprudent, but now ... winning.  Fat tax bill?  Guess again.