Are principal reductions the answer?

NEW YORK – Feb. 15, 2010 – Real estate investors are coming to the same conclusion that housing activists reached at the beginning of the crisis – forgiving principal on underwater loans may be the best way to deal with the problem.

“Principal reduction is the only answer,” says Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group L.P.

Some activists and investors are asking banks to consider principal reductions so that the amount borrowers owe on underwater loans can be sharply reduced. They say this offers the best incentive for borrowers to continue to make their monthly mortgage payments.

Even though principal reductions are complicated transactions for lenders, even the largest of them are beginning to accept the idea.

“Everybody’s realizing there is a place for principal reductions to a much greater extent than before,” says Jack Schakett, a senior Bank of America Corp. executive involved in loan workouts.

Micah Green, a partner at law firm Patton Boggs LLP, who represents some of the largest investors in mortgages, shrugs the idea that write-downs are unfair to those who continue to make their payments. “Everybody’s going to have to give a little for it to work,” he says.

Source: The Wall Street Journal,