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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