Principal Forgiveness Increasingly Part of the Solution

No one likes losing money on a deal, but when losing some now means keeping the loan out of default and potentially making more in the long run at the same time you keep borrowers in homes and speed the economic recovery, then it’s something that should be seriously considered. In fact, that’s what we’re seeing happen in the marketplace.

We’re already seeing more servicers that participate in the Home Affordable Modification Program use principal reduction to help underwater borrowers and make their payments more affordable. And they’re doing it more often, according to a recent Treasury Department report. Nearly 5,000 HAMP modifications included principal reductions, with the average principal amount reduced by $69,500.

And for those that aren’t considering this option on their own, the courts are helping out. While the dust hasn’t cleared yet on the BoA/BNY Mellon Settlement Agreement, part of the $8.5 billion deal includes language that will make it easier to modify many of the high risk loans that are due to be placed with special servicers. The settlement agreement spells out what these special servicers must do, but indicates that the resolution may, “pursuant to the Governing Agreements, include principal reductions.”

Expect to see more principal forgiveness in the days ahead as we work through this downturn. I expect it will become more and more in vogue among special servicers, and that’s good. It means that people are starting to get it.

As always, I look forward to your comments.