Abstract
Principal reduction modifications are a cornerstone of the preliminary term sheet released by the State Attorneys General in March 2011.As a result, there has been increased attention to the success of these modification programs and the attendant moral hazard issues. In this article, the authors make a case for principal reductions, arguing that because negative equity drives defaults, principal reduction is the most successful type of modification. They offer some suggestions on better aligning incentives to minimize the strategic default issue. They also present evidence that it is very dangerous to not do these modifications and hence exacerbate the vicious home price depreciation/negative equity cycle.
- Copyright © 2011 Amherst Securities Group LP. All rights reserved. Not to be reproduced or redistributed without permission.
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