Panelists hotly debated principal reduction at the ABS East Alternative Loan Modification Programs for Distressed and Non-Performing Loans panel, with some saying reducing mortgages is the path to borrower success, and others countering that the mod makes for moral hazard and a hit for investors to absorb. “Some people in this audience would say principal reduction is the devil,” said Michael Bradley, v.p. of analytics at CoreLogic. “You need tools to selectively identify who to give principal reduction to, and do it with a scalpel, not an axe.”
But some new funds are offering innovative approaches to principal reduction that align borrower success with investor payoffs. Carl Webb, managing partner at Paladin Strategic Partners, relies on reducing principals to turn a profit on the non-performing mortgages his fund buys up. “My firm is on the front lines getting mods done, and I disagree with the need to use principal reduction sparingly,” Webb said. “We need to do more of it.”
An audience member raised the issue of moral hazard, saying that chopping dollars off the debt of a delinquent borrower meant giving them a reward kept from a dutiful borrowers keeping current on their payments. “That someone should decide to not live by the promise to pay back their mortgage, you can be morally repulsed by it,” Bradley said in response. “If you want to incent the borrower to behave the way you want them to behave you have to pull the right levers.”