How Home Equity Loans Keep Big Banks From Modifying Mortgages

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There’s a fine line in the sand drawn between two parties in the world of loan servicers: those who will reduce principal and those who absolutely will not.

In the latest edition of Asset Backed Alert, an article details how smaller servicers such as American Home Mortgage and Litton Loan Servicing are using good judgment and are helping homeowners reduce principal owed and the like on their mortgages.

The reason why these companies are working with homeowners is due to the fact that they are small and independently run, unlike servicers owned by big banks. ABA explains:In some cases, the bank-owned players are reluctant to forgive or delay principal because their parent companies also extended home-equity loans to the borrowers. With many homeowners already under water, cutting principal from the first-lien mortgages in those cases would also necessitate reductions for the home-equity credits. Depending on the loan terms, the banks might be forced to wipe out home-equity balances altogether.

Either way, the issue is hot with investors right now and needs to be resolved in a timely manner, before the write downs overburden their associated firms.

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