Project Lifeline benefits must work for the bank first, the borrower second.

Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo agree in unison to adopt a policy that offers borrowers who are at least 90 days late a ‘30 day window’ to try and negotiate a foreclosure saving deal, loan modification, what have you.  The New York Times reports this could help ~425,000 homeowners, albeit the actual number is likely a fraction of this.

While this may seem like a thoughtful gesture by the big six, agreeing to try to negotiate better terms with delinquent homeowners has potential significant benefits for the banks too.

They’ve all got REO inventory that is swelling, which is dead money on the books, which causes quarterly reports to look bad (via write downs et. al.).  Bad quarterly reports typically yield a Wall Street downgrade or some other bad press and a resulting (further) loss of stock value.  Renegotiating to keep (reduced) cash-flows coming in is better than paying out to repossess the property through the expensive foreclosure process.

There are a couple provisions of note to qualify to play Lifeline or No Lifeline with the big six lenders:

As mentioned above, the borrower must be at least 90 days late but not within 30 days of foreclosure.  The thought here is, ‘If the bank has already spent the money on attorneys etc to take the home, why stop now?’

The home must be owner occupied, 2nd homes and investment properties need not apply.

The lack of provisions in this ‘package’ is far more noteworthy since there appear to be no other guidelines that the banks have promised to follow.  My guess is that they’ll look at each borrower and situation and asses whether renegotiating is economically in their best interest.

Does the home appraise for $200k today and the principle balance is $210k?  Lifeline!

Does the home appraise for $200k today and the principle balance is $150k?  No Lifeline!

Can the borrower actually prove he/she has a job and assets to sustain a slightly lower mortgage payment?  Lifeline!

Is the borrower working the fry station and scraping by with little to no money in the bank?  No Lifeline!

…You get the point.

In the end, this announcement amounts to little more than whats been going on in the loan modification / loss mitigation departments of banks for awhile now. 

Matt at Inman keenly observes  that these announcements come at a time when Congress is considering tinkering with bankruptcy laws that would allow judges the right to modify mortgage terms and payments without nearly as much consideration to the bank.

One does get the feeling that the banks are saying ‘Look, see, we’re doing our part, we promise!  Please stay out of our sandbox ’