The Wall Street Journal has an interesting report on mortgage firms slashing troubled borrowers’ principal, rather than foreclosing on them. I didn’t know this was going on at all, and it’s a hopeful sign that lenders may be finally realizing what they need to get this crisis behind them .

And why not do it? Foreclosing on a house causes a huge loss for the lender. The Journal says here it costs one firm 59 percent of the loan amount. Here’s what one Florida servicer is doing:

Reducing the principal on mortgages is “a last resort,” says Paul Koches, executive vice president at Ocwen Financial Corp., a West Palm Beach, Fla., loan servicer that has shrunk the amount owed on 10,884 delinquent mortgages as of Sept. 30. That is 23% of all the loans modified by Ocwen so far this year.

On average, such borrowers saw their loan payments drop by 20% to 40%, typically by lowering the loan balance and interest rate. Ocwen estimates that the savings for investors who own the mortgages vary from a nominal amount to more than $325,000 per loan compared with the likely return if the loans wound up in foreclosure.

The problem is, because of securitization, mortgages have been sliced and diced so that many investors own a stake in a mortgage, rather than the old style of a bank or Fannie Mae holding the loan itself.

Good for the Journal for finding this story. I’m betting you’ll see a lot more of this in the coming months and years.

If you'd like to help CJR and win a chance at one of 10 free print subscriptions, take a brief survey for us here.

 

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.