I’ve excerpted below from a paper by New York Fed Researchers Andrew Haughwout, Ebiere Okah, and Joseph Tracy: Second Chances: Subprime Mortgage Modification and Re-Default Although the paper uses subprime data, the general results are applicable to all mortgages. The researchers point out that principal reductions lead to much lower redefault rates (that is obvious, but still worth noting). They also note that principal reductions help mitigate the mobility problem – as I’ve noted before, the lack of worker mobility slows the potential growth of the economy, leads to lower home maintenance, and possibly “diminished support for local public goods” 1 . But the authors don’t suggest who should pay for the reductions in principal. If this was a government program, it would be very expensive and unpopular. Diana Olick wrote today at CNBC: Are Principal Writedowns the Answer to Housing Crisis? I would honestly rather see my home’s value go down than see the guy next door … who made a poor/negligent financial decision get a mulligan at my expense. I think that would be the overwhelming public reaction. Some people point to Lewis Ranieri’s apparent success with principal reductions, from Fortune: Lewie Ranieri wants to fix the mortgage mess Now Ranieri is championing an inventive solution for fixing the mess he’s accused of enabling in the first place.

Read more here – New Research on Mortgage Modifications and Principal Reduction