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Two of the nation’s largest banks are letting people out of expensive mortgages, including people who never asked for the help. Chase and Bank of America are offering some homeowners big reductions on interest rates, and in some cases even lowering the principal of the loans, according to bank statements and a recent story by The New York Times.

The unexpected modifications come even as hundreds of thousands of Americans try—and often fail—to apply for changes that would make their mortgages more affordable.

“I don’t get it,” says Lawrence J. Whit, an economist at New York University and former member of Freddie Mac’s board of directors. “Why do it before the borrower comes in? That’s the mystery.”

The practice could be controversial because of the widely-reported failures by many large banks to simply keep up with the crush of homeowners applying for loan modifications. Bank of America, Chase and Wells Fargo are all doing such a poor job administering mortgage changes under the federal Home Affordable Modification Program (HAMP)that all three were cut off from taxpayer funding until they improve, as we reported last month.

HAMP has helped only about 700,000 people win modifications, a fraction of the 4 million it was designed to reach, as we reported.

[Related Article: Treasury: Top Three Banks Doing Poor Job at Mortgage Modifications]

Despite these challenges, Bank of America and Chase are reaching out to some homeowners with risky loans, including “option-ARM” mortgages, which start out with low interest rates and monthly payments that increase over the life of the loan. Those increases are becoming big headaches for many homeowners, who are stuck paying more even as the continued housing recession causes the value of their homes to plummet.

People who owe more than their houses are worth are called “underwater” in mortgage industry parlance. Such people are much more likely to default on their loans. People with option-ARMs are especially at risk, since cost of their loans continues to rise even as their home values drop.

So Chase and Bank of America are renegotiating the loans, often without waiting for homeowners to request modifications.

“Chase has developed proactive programs to assist current Pay Option ARM borrowers who may be at higher risk of default,” David Lowman, CEO of home lending at JP Morgan Chase, told the Senate Banking Committee in November. “To eliminate any potential payment shock, we offer to modify the loan to a fixed payment, keeping the borrower’s monthly payment at its current amount.

[Article: Keeping Banks Honest: Protect Yourself During Foreclosure]

Chase never wrote option-ARM mortgages itself. Rather, it obtained $50 billion worth of the loans from Washington Mutual when it purchased the failed savings and loan in 2008. Since then the bank has modified 22,000 such mortgages worth $8 billion, Lowman told the Senate. A Chase spokesman declined to comment about the program.

Renegotiating such high-risk loans makes sense whether homeowners ask for the modifications or not, says Bruce Marks, CEO of the Neighborhood Assistance Corporation of America, a nonprofit group that operates one of the most successful loan modification operations in the country.

“The reason why they’re doing it is because they know these mortgages are structured to fail,” Marks says “and it’s only a matter of time” before they do fail.

Besides, Marks points out, the banks already have assumed they’re not going to make their money back on these loans, as evidenced by depository banks taking a $33.3-billion hit in the first quarter of 2011 for loans they are unable to collect, according to the FDIC.

“So if you’ve already written them down, you’re not losing anything by modifying them,” Marks says. “You don’t have the accounting issues you would if you continue to hang onto the false premise that these other loans are going to perform.”

Bank of America acquired over 550,000 option-ARM loans when it bought Countrywide Financial in 2008. More than 400,000 of thse loans were converted to more stable mortgages, Rick Simon, a Bank of America spokesman, told Credit.com in an email. Some of the loans already were delinquent. In other cases the homeowners were still current on their payments, but faced rising payments that could make their mortgages unaffordable, said Simon.

Some homeowners actually received new loans that lowered the principal, Simon said. The bank has offered to reduce the principal on 40,000 home loans, at a total loss to the bank of $3.3 billion, saving the average homeowner $81,000 apiece.

For other borrowers, the bank waived penalties for early payment, reduced the interest or extended the term of the loan.

[Article: What it Takes to “Foreclose” on Your Bank]

Image: Mike Wilson, via Flickr.com

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