Loan Modification – The case against principal reduction

Posted on January 18, 2009. Filed under: Foreclosure Defense, Loan Modification | Tags: , , , , , , , , |

Why don’t we have more meaningful foreclosure assistance…prinicpal and/or rate reductions? Because lender’s …”are wary of the consequences of being known as a bank that forgives principal…”.

But is this because the banks are simply horrible, evil people with no compassion…or is it due to some macro-economic theory of hitting bottom unimpeded?

Nope…on both accounts!

The real interesting part of the study comes when the algorithm gives both types of credit borrowers back a 10% percent equity stake in the home and recalculates the foreclosure probability and the “Net Gain” between Type I and Type II Errors.

Looking at this we see the probability of foreclosure on the prime borrowers barely move but on the subprime borrower it drops considerably…from 33% down to 9%. On the surface, you’d think that would support the idea lenders and policy makers could benefit from a “principal reduction” strategy.

But wait…

We still have a negative net gain number even after simulating a principal reduction for all home-owner borrowers. The authors define the chart this way…


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One Response to “Loan Modification – The case against principal reduction”

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Who knows what’s going to happen. Here in Miami people who need to sell their house have few options since they are under water. Or they are in complete denial that their house is worth less than half of what they owe on it. If you bought in the last 5 years and didn’t put a large amount of money down, you’re stuck. Most people are starting to figure out that the banks can’t or won’t help them and they feel helpless.

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