Bank Charges May Surge as Mortgages Marked to Market

March 4 (Bloomberg) -- Patricia Greenberg’s townhouse in Irvine, California, was losing about $10,000 a month in value when she received a letter in February 2008 that looked too good to be true: An investor was offering to cut her $472,000 mortgage by 26 percent and her monthly payment by a third.

“I didn’t want to get involved in a scam,” says Greenberg, a cosmetics saleswoman for Orlane Inc., who had bought the house with no money down eight months earlier.

It was no ruse. New York hedge fund manager Ralph DellaCamera Jr. says he’d purchased the mortgage for 60 cents on the dollar and forced the originator, MLSG Home Loans of Reno, Nevada, to eat the loss. Protecting his investment, DellaCamera lowered Greenberg’s debt to keep her in the home. She now pays $2,400 a month instead of $3,800 and plows some of her savings into upgrading the Cape Cod-style residence.

One in five borrowers in the $10.5 trillion U.S. mortgage market owes more than their property is worth, according to First American CoreLogic Inc., a real estate data company based in Santa Ana, California. Just one in 10 have received the principal reductions that research demonstrates is more effective at preventing defaults than the temporary payment reductions promoted by banks and the federal government.

“You have to take the poison out of the water at the source,” says Ron D’Vari, 50, the former head of structured finance at New York-based investment adviser BlackRock Inc. and now chief executive officer of his own investment advisory firm, NewOak Capital LLC. “You have to go to the borrower, and you need to create liquidity at the borrower level.”

Bank Solvency Threat

One reason banks resist lowering borrowers’ principal is that doing so could threaten their solvency. In the worst slump since the Great Depression, the banks’ unrealized losses exceed their capital cushions by $400 billion, according to Nouriel Roubini, a professor of economics at New York University’s Leonard N. Stern School of business.

When three of the biggest mortgage lenders, Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. announced plans late last year to modify as many as 1.3 million mortgages, only Charlotte, North Carolina-based Bank of America explicitly pledged reductions of principal on some loans. Under an agreement with states investigating the lending practices of its Countrywide Financial Corp. unit, the bank said it would modify 400,000 Countrywide mortgages at a cost of $8.4 billion.

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