S&P: Principal Reductions Perform Better Than Rate Decreases

November 25, 2013
Housing Wire  
mortgage lending news

A new study from Standard & Poor's indicates that the likelihood of a new default exceeds 50 percent for borrowers who receive interest rate reductions. However, homeowners who obtain the benefit of a write-down and equity gains generally have a better chance of staying current on their mortgages afterward, according to the report.

Nonetheless, investors in residential mortgage-backed securities stand to lose whether borrowers obtain a principal write-down or an interest rate reduction. In the case of a write-down, liquidation of a home due to failure to pay and re-default will lead to higher a much higher loss than if the property had been foreclosed on earlier. CoreLogic has reported that principal write-downs have accounted for only about 10 percent of loan modifications over the past four years, with interest rate cuts being much more common.

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