Posted on Monday, January 18, 2010
A recent fed study shows that servicers who write down principal as opposed ot just lower rates see a much lower re-default rate. Many argue the principal write down is smaller than the loss from re-default.
Cutting a payment by 25% by reducing interest reduces defaults by 11% for the first year. But lowering the payment by the same 25% by cutting 25% of the principal together with a small rate cut supposedly makes the borrower 27% less likely to default again. An estimated 23% or 10.7 million properties have negative equity as of the end of 2009.