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From the WSJ:

J.P. Morgan Chase & Co. launched an ambitious plan Friday to modify the terms of $70 billion in mortgages for borrowers who are behind on their payments or soon could be.

The move by the New York bank will cover as many as 400,000 borrowers. They’ll be moved into loans carrying lower interest rates, smaller principal amounts or other more-affordable terms.

This is great news…They must have figured that these high yielding, Option Adjustable Rate Mortgages aren’t worth too much if the borrowers default on the mortgage. Option ARM’s are particularly toxic since they allow the borrower to make a minimum payment which may not even cover the due interest – resulting in a higher loan balance (which accrues more interest over time).

The changes will particularly focus on a type of loan structured in such a way that the borrower’s outstanding balance sometimes grows month after month. J.P. Morgan inherited $54 billion of such loans with its takeover of the beleaguered thrift Washington Mutual Inc. in September.

The article goes on to point out that Wachovia had $120 billion worth of these exposures from their purchase of Golden West Financial, and that they had initiated the process of restructuring the terms of the loans. It is a smart step in making sure that home owners will be able to eventually pay down their principle; the last thing these banks want is an increase in mortgage defaults – therefore reducing mortgage interest rates is necessary in preventing this from happening. Now that the Government has replenished some of the lost capital in the banking system, giving the bigger banks as much as $25 billion, don’t be surprised to see Bank of America, Wells Fargo, and Citi follow JP Morgan’s footsteps.

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