I’m not convinced that we’re going to see a really meaningful trend of banks reducing the principal as a way of keeping underwater mortgage holders from defaulting. Too many mortgages continue to be paid, no matter how far underwater they are.

But principal reductions or writedowns could help us get through the ongoing housing crisis much more swiftly.

NPR’s All Things Considered had an interesting piece about the increased use of principal reduction: In Mortgage Crisis, Some Banks Agree To Cut Losses.

You can listen to the whole thing here:

If you don’t want to listen, check out this excerpt:

In 30 percent of private loan modifications last year, banks were doing a principal write-down — that is, hacking away at the amount owed, as far down as the current market value. They’re doing it so borrowers can actually afford payments. Two years ago, that 30 percent was just 2 percent.

The problem, of course, is that not enough loan modifications are actually happening.

More:

Housing prices have plunged back down to earth. Cherry says it’s time to match affordable homes with people who can actually afford them. That’s her business, in fact: Boston Community Capital runs an investment fund.

[The nonprofit Boston Community Capital's CEO] Cherry is going to the major banks with an offer: “Sell everything that you’ve got at current market prices, so that you clear your books, you take your losses. And then you, as a healthier lender, can go back out and lend some more.”

Boston Community Capital is willing to buy the most distressed homes at the going rate, and take on the risk of reselling to homeowners like Jordan. The nonprofit actually makes some money by selling at a slight markup.

In a foreclosure, banks make nothing. Worse yet, they lose — in missed mortgage payments, taxes, insurance and eviction fees. Cherry’s appeal is simple: “We can reduce your costs.”

If banks begin to see write-downs as being in their self-interest, we could see more improvement in housing than most of us expect in 2012.

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