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Some relief may be in sight for troubled US mortgages

As more than 5 million Americans fall behind on mortgages, banks signal a new willingness to reduce the principal.

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Groups that advocate for troubled homeowners say the answer is not that complex.

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“Right now we have loan modifications that don’t reduce the monthly payment,” says Jim Carr, Washington-based chief operating officer of National Community Reinvestment Coalition, a group of 600 local development organizations. “It’s hard to believe how anyone can conceive of that as making the loan more affordable.”

In the past, the mortgage industry has supported efforts such as the Hope Now Alliance, which estimates it prevented 2.2 million foreclosures last year. A lot of its efforts go toward voluntary interest-rate moratoriums by lenders or efforts to modify mortgages without affecting the principal amount due.

However, future revisions may also need to factor in how much homes have dropped in value. “Someone who may have been in a $100,000 loan at the peak of the market now [is] looking at a house valued at $75,000, which means the mortgage company has to write off 25 percent of the loan,” says Tony Brancatelli, a Cleveland city councilman and expert on troubled housing. “The mortgage companies are still not writing down the loans enough to meet the market losses.”

But mortgage servicing companies also are aware there is a risk in writing down the principal in a mortgage. “You can destabilize market values,” says Ed Delgado, a senior vice president at Wells Fargo in Fort Mill, S.C. “A homeowner who has been granted a principal reduction could potentially be more willing to discount a sale price, versus a homeowner who did not enjoy a similar reduction in obligation.”

One mortgage servicing company that has been lowering the principal amount owed is Ocwen Financial Co. Nineteen percent of all the modifications in the company’s portfolio included some component of principal reduction, says Paul Koches, executive vice president and general counsel for the company based in West Palm Beach, Fla., in an interview. “The average loan balance for these loans, pre-mod, was $157,000, and the average principal reduction was $33,000,” he says in an e-mail.

“Principal reduction is a last resort,” he adds, but is preferable to foreclosure, which results in less money for the investors who made the original loan. Ocwen’s redefault rate is half the national average.

Advocates for borrowers say it’s critical that lenders give some leeway to troubled borrowers.

“A lot of time, the interest-rate cuts have just not been that great,” says Moe Bedard, founder of Loan Safe Solutions. “People need a little breathing room.” Mr. Bedard says hard-pressed borrowers are taking loan modifications but still redefaulting. “Some are saying, ‘I’ll take the modification, but in six months I’m outta here.’ ”

That is one reason some people counsel the need for a holistic approach. “You could be modifying the loan, but there could be other debt and issues in the household,” says Marietta Rodriguez, who runs the homeownership program at NeighborWorks in Washington, D.C. “You need to look at ... changes in income or other debt loads.”