More than one-fourth of delinquent mortgage borrowers who got principal reductions of 20% or more defaulted again within six months, Fitch Inc. said Tuesday.
Though servicers have not used principal reductions "to an extent which allows a clear determination of their success," Fitch said, the amount of principal reduction "has not made a great deal of difference to date in the success" of modifications. Instead, a combination of principal and interest reductions has reduced redefaults, Fitch found.
The rating agency's analysis clashes with that of analysts and academics who found that reducing principal — rather than reducing or freezing the interest rate and allowing missed payments to be rolled into the balance — helped prevent repeat defaults.
According to Fitch, roughly 28% of loans that had principal reduced by 20% or more redefaulted in six months, whereas loans with principal and interest reductions had a 21% redefault rate in the same period. Loans with 10% to 20% increases in principal and interest had the highest redefault rate, at 49%, Fitch said.
