Is Mortgage-Debt Forgiveness Worth the ‘Moral Hazard’?

The Wall Street Journal
Apr. 2, 2012

Most modifications today reduce monthly payments by lowering the interest rate, extending the loan term, and offering forbearance, where payments aren’t required on a portion of the loan balance. So far, Mr. DeMarco says the performance of modified mortgages depends most heavily on how much a borrower’s monthly payment has been reduced—not the extent to which a borrower is upside-down on the mortgage.

“We’re just not seeing the borrowers’ willingness to pay vary by their loan-to-value,” said Mr. DeMarco.

But advocates of write-downs say banks can design programs that help limit their appeal to only the most desperate homeowners. “You need to introduce frictions to achieving principal write-down so that those who really need it, get it, and those who don’t really need it will see that the other guy is getting not a windfall,” says Laurie Goodman, senior managing director at Amherst Securities Group LP.