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Mortgage Principal Write-Downs Lag Even With States Paying

Three years after the collapse of the housing bubble, one of the questions weighing on the real estate market is whether and when to write down the value of outstanding mortgages. Millions of houses, including almost a third of California’s mortgaged homes, are worth less than what was borrowed on them, according to CoreLogic, a real estate data company in Santa Ana, California.

While several states and the Federal Housing Administration have developed programs to encourage write-downs, the number of principal reductions remains small and suggests the problem goes beyond the reticence of banks.

“It’s hard to justify principal reduction,” DeWeese said. “The data so far available is not profound enough on the ground to convince the banks.”

Moreover, the math still doesn’t add up for lenders. For houses mortgaged at twice or more of their value, the cost of principal reduction “is gigantic relative to the cost of a foreclosure,” he said.

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