RT Journal Article
SR Electronic
T1 The Case for Principal Reductions
JF The Journal of Structured Finance
FD Institutional Investor Journals
SP 29
OP 41
DO 10.3905/jsf.2011.17.3.029
VO 17
IS 3
A1 Laurie S. Goodman
A1 Roger Ashworth
A1 Brian Landy
A1 Lidan Yang
YR 2011
UL https://pm-research.com/content/17/3/29.abstract
AB Principal reduction modifications are a cornerstone of the preliminary term sheet released by the State Attorneys General in March 2011.As a result, there has been increased attention to the success of these modification programs and the attendant moral hazard issues. In this article, the authors make a case for principal reductions, arguing that because negative equity drives defaults, principal reduction is the most successful type of modification. They offer some suggestions on better aligning incentives to minimize the strategic default issue. They also present evidence that it is very dangerous to not do these modifications and hence exacerbate the vicious home price depreciation/negative equity cycle.TOPICS: Equity portfolio management, portfolio theory, portfolio construction