With the election now over, focus will turn back to what ails the economy. And front and center will be the continuing housing crisis. Foreclosure rates keep going up and the $700 billion bailout has yet to spur lending.
So what is a bank with a collapsing loan portfolio to do? Take matters into their own hands. Bank of America (NYSE:BAC) previously announced it would work with delinquent borrowers to try and stave off foreclosures, and now JP Morgan Chase (NYSE:JPM) is doing the same.

JP Morgan Chase has announced it will delay foreclosure proceedings while it works with struggling homeowners.  Over the next 90 days, the bank will look at loans and determine if the loan is eligible for a reduced interest rate or loan balance.

The company has already helped over 250,000 families with over $40 billion in troubled loans, and over the next two years plan to help another 400,000 homeowners with over $70 billion in loans. Loans held by Washington Mutual (NYSE:WAMU) and EMC Mortgage Corp, which were recently acquired by JP Morgan Chase, will also be eligible for revision.

What remains to be seen is the effect this will have on foreclosure rates. Reducing a borrower’s interest rate slightly doesn’t necessarily translate to a large reduction in a mortgage payment. A drop of $75 or $100 a month in the mortgage payment would be welcome for the homeowners, but the savings could quickly be eaten up by rising costs elsewhere.

Hopefully the plan relies more on reducing principal balances to more accurately reflect fair market values. This would help by stabilizing home values at fair-market levels, rather than letting foreclosures decimate neighborhoods.

For example, if a home bought a few years ago for $250,000 gets re-appraised for $180,000 and the borrower can now afford the payments and avoids foreclosure. This drops the value down to $180,000 for comparables, but avoids a potential drop to $125,000-140,000 if the home goes into foreclosure and gets sold at auction. Not a perfect solution, but anything is better than another foreclosure.

Source: Focus Can Now Shift To The Collapsed Housing Market