Banks Taking Loan Modifications Further

In an article from the Wall Street Journal, banks and loan investors are starting to bit the bullet and lower the principal due on home mortgages for some borrowers.

Loan modifications typically involved only a temporary reduction in the interest rate of the loan or an modification of the time period the loan is due.

Part of this due to the Obama administration encouraging banks to help keep homeowners in their homes. Part of this economic plan has provided incentives to banking institutions to find solutions to help homeowners.

At the same time, banks now have more flexibility to modify loans because of their success in stabilizing their balance sheets and, in some cases, raising fresh capital. Banks can afford “to take the pain up front,” said Kevin Fitzsimmons an analyst at Sandler O’Neill & Partners LP in New York. “If they want a legitimate chance of salvaging something out of the loans, they are better off taking the loss now.”