A report by Amherst Securities Group has found that reducing the amount U.S. homeowners owe on their mortgages is helping to prevent foreclosures.
This method has proven to be more effective than other ways, which includes postponing payments and reducing interest rates.
The report noted that homeowners are more likely to pay their mortgage on time if the principal was reduced near the property’s market value. Borrowers are also less likely to re-default.
According to Amherst, only 12 percent of borrowers who obtained principal reduction defaulted again last year compared with 23 percent who received an interest rate reduction (but without principal reduction), and 30 percent who received forbearance, which defers their debt repayment.
“(Modifications) with principal forgiveness are apt to be most effective, as the borrower no longer owes the money — so he is no longer hopelessly underwater,” said Laurie Goodman, Housing Market Analyst at Amherst.
The success of debt forgiveness in turning delinquent borrowers back into paying customers has encouraged many banks to step up principal reductions on mortgages in their own portfolios.
To date, debt forgiveness accounts for 40 percent of modifications done by lenders, up from 25 percent last year and 11 percent in 2010.
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