Fed Study Finds Principal Writedowns Minimize Risk of Redefault

div class=”posterous_bookmarklet_entry” blockquotediv pServicers who lower distressed homeowners’ mortgage payments by reducing the principal balance, as opposed to just making interest rate adjustments, are much more likely to see the payments keep coming in and ward off a redefault, according to a a href=”http://www.newyorkfed.org/research/staff_reports/sr417.pdf” target=”_blank”new study/a published by the a href=”http://newyorkfed.org” target=”_blank”Federal Reserve Bank of New York/a./p pimg src=”http://www.dsnews.com/site/img/catalog/articles/falling-prices.jpg” border=”0″ height=”225″ width=”340″ //p pThe economists found a definite pattern among modifications made since December 2005 that suggests “an intention among servicers to make the loans more affordable, while not losing any of the underlying principle.” However, their analysis shows that modifications that trim off some of the loan balance have higher rates of success and “can double the reduction in re-default rates.”/p pWhile principal writedowns essentially mean the lender or investor must eat a loss, many analysts argue that it’s a smaller loss than comes with the eventual foreclosure and the price tag of a nonperforming asset in today’s housing market, already swollen with spanREO/span inventories and vacant properties./p pAccording to the New York Fed’s economists, when a borrower’s monthly mortgage payment is cut by 25 percent by reducing the interest rate only, the borrower is 11 percent less likely to default within one year./p pBut, if the monthly payment is lowered by the same 25 percent, this time by shaving 25 percent off of the outstanding loan balance, coupled with a small interest rate cut, the chances that the borrower will defaulting again within one year drops by nearly 27 percent./p /div/blockquotediv class=”posterous_quote_citation”via a href=”http://www.dsnews.com/articles/index/fed-study-finds-principal-writedowns-minimize-risk-of-redefault-2010-01-05″dsnews.com/a/div p/p/div p style=”font-size: 10px;” a href=”http://posterous.com”Posted via web/a from a href=”http://giabfreer.posterous.com/fed-study-finds-principal-writedowns-minimize”Gia Freer/a /p