Banks May Warm Up to Idea of Principal Reductions

January 7, 2010

Under water mortgageThe foreclosure crisis is likely to deepen this year with many adjustable rate mortgages set to balloon.  As a result, reports banks are taking a closer look at whether principal reductions on under-water mortgages make financial sense for both parties.

In the past, efforts by U.S. banks to help distressed homeowners have focused mainly on temporary fixes such as interest-rate reductions that may only put off the day of reckoning, despite policy makers wanting them to do more.

Now, while principal reductions remain rare, banks are doing them more often. In the third quarter of 2009, some 21,000 home loans — 3 percent of the total modified mortgages — included a principal reduction or deferral, according to Mortgage Metrics, a government publication. That’s up from 6,245 in the first quarter of 2009, the first time the U.S. reported the data.

Click here to read more in this report from BusinessWeek on