Do Principal Forgiveness modifications really perform better than Principal Deferral?
We believe the answer is NO. Creating an affordable payment is what drives performance. We have never been big advocates of principal forgiveness, as we do not believe that principal forgiveness achieves better performance than principal deferral. We know some studies may suggest that principal forgiveness works better, but we have never been able to come to the same conclusion. In our opinion, the use of principal forgiveness over deferral hurts investors. Forgiveness is a permanent loss, and in a rising home price environment, forgiveness makes no sense for investors. We strongly believe that borrowers experiencing detrimental life events are payment sensitive. If the servicer can achieve a payment that a struggling homeowner can afford, then the loan will perform. The notion that homeowners know the precise value of their home and the degree to which they are underwater is a fantasy. The goal of providing relief to struggling homeowners should only focus on achieving an affordable payment.
Here is a look into our thought process and some of the data that supports our findings. Our study may not be very scientific, but it is logical and easy to understand.
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