Principal Cuts on More Lender Menus as U.S. Foreclosures Rise

Business Week Online
January 7, 2010
Gittelsohn, John; Gopal, Prashant

Despite efforts by U.S. banks to remedy many homeowners' financial crises with temporary solutions such as interest-rate cuts, the predicted rise in foreclosures and re-setting payments on poorly designed loans is likely to drive banks toward principal reductions. Because some borrowers have reached the point of having no equity or even negative equity, a re-sized mortgage and accumulation of equity through a principal reduction could provide homeowner with incentive to remain in their home rather than turn over the keys. Banks can either defer principal or forgive it outright and, while still the exception rather than the rule, the use of principal reductions is increasing. According to Mortgage Metrics, 3 percent of all modified home loans in the 2009 third quarter involved a principal reduction or referral. Banks can benefit from principal reductions because loans are less likely re-default, but many banks are attempting to keep the option of principal reduction from becoming common knowledge. Conflicts existing between mortgage lenders and home-equity lenders as well as a key lawsuit between Greenwich Financial Services and Countrywide Financial are slowing the progress of principal reductions. There is hope that an increase in principal reductions would halt the increasing number of homeowners with negative equity and help them commit to their mortgages once again.

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