Principal write-downs better for borrowers than investors

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Interest rate reductions tend to be the preferred form of loan modification, but borrowers who obtain principal write-downs are more likely to stay current on their mortgage payments, Housing Wire reported, citing a study from Standard & Poor’s Ratings Services.

Of borrowers who receive only a rate reduction, just over 50 percent are likely to redefault, the news outlet said.

Those who receive principal write-downs have a better chance of staying current. They represent more risk for investors in residential mortgage-backed securities, however. If such a borrower were to redefault, the eventual liquidation of the home would lead to more severe losses for RMBS investors, worse than if the home had just been foreclosed on early on, Housing Wire said.

Source: Housing Wire