Editor: David Reiss
Brooklyn Law School

May 2, 2013

The Weak Can Never Forgive?

By David Reiss

S&P has issued a report, Principal Forgiveness, Still The Best Way To Limit U.S. Mortgage Redefaults, Is Becoming More Prevalent, that asserts that its research “demonstrates the likelihood that servicers will recover a greater portion of their receivables through principal forgiveness versus other modification tools,” such as rate modification. (5) In particular, the authors found that as of March of 2013, “loans that received a principal reduction maintained the highest percentage (about 76%) of current-pay borrowers. By contrast, on average less than 50% of loans outstanding that received a modification other than principal forgiveness remained current.” (4)

I am not sure that their research actually demonstrates a causal connection between principal modification and recoveries as opposed to just providing a correlation between the two.  This perhaps naive analysis does, in any event, raise interesting and important questions about the efficacy of modifications.

And modifications are increasing.  Indeed, as of “February of this year, more than 1.5 million homeowners have received a permanent modification through the U.S. federal government’s Home Affordable Modification Program (HAMP).” (1) Since last year, there has been “22% rate of growth in the number of modifications on an additional $2.4 billion in mortgage debt.” (1) Among the big five servicers, “principal forgiveness, as a percentage of average modifications performed on a monthly basis, has increased by about 200% since the latter half of 2011.” (1) And since 2009, “servicers have forgiven principal on approximately $45 billion of outstanding non-agency mortgages.” (1)

At the beginning of the crisis, many were terrified about the impact that principal modification would have on investors. FHFA Acting Director DeMarco was also concerned about the impact of Fannie and Freddie principal reductions on taxpayers. With a new Director for FHFA on the horizon, there might be a change of direction on this.

Gandhi said that forgiveness is an attribute of the strong.  Perhaps, our housing market is now strong enough to contemplate some serious loan forgiveness.

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