Principal Reductions Best Way to Avoid Foreclosure, Experts Say

November 26, 2013

When helping struggling home owners, principal reductions on mortgages tend to help them avoid foreclosure more than reducing the interest rates on the loans, according to analysts at Standard & Poor’s Rating Services. 

The likelihood of home owners redefaulting is more than 50 percent for interest rate reductions, but borrowers who get a write-down and equity gains generally have a better chance at staying current on their mortgages, the analysts note in a report, “How Principal and Interest Rate Modifications Affect U.S. RMBS.” 

However, lenders tend to prefer interest rate reductions when helping home owners. Only about 10 percent of loan modifications in the past four years involved principal write-downs on the mortgage. 

Write-downs can have more risk for investors. Borrowers who receive a write-down but then fail to pay will cause the home to become a higher loss for RMBS investors than if the home had just gone into foreclosure early on, S&P analysts noted.  

Source: “S&P: Principal reductions perform better than rate decreases,” HousingWire (Nov. 25, 2013)

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