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  • Cited by 4
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    This article has been cited by the following publications. This list is generated based on data provided by CrossRef.

    Fitzpatrick, Trevor and Mues, Christophe 2016. An empirical comparison of classification algorithms for mortgage default prediction: evidence from a distressed mortgage market. European Journal of Operational Research, Vol. 249, Issue. 2, p. 427.

    CAMPBELL, JOHN Y. and COCCO, JOÃO F. 2015. A Model of Mortgage Default. The Journal of Finance, Vol. 70, Issue. 4, p. 1495.

    Das, Sanjiv R and Kim, Seoyoung 2014. Going for Broke:Restructuring Distressed Debt Portfolios. The Journal of Fixed Income, p. 140614044814001.

    Das, Sanjiv R and Kim, Seoyoung 2014. Going for Broke:Restructuring Distressed Debt Portfolios. The Journal of Fixed Income, Vol. 24, Issue. 1, p. 5.

  • Journal of Financial and Quantitative Analysis, Volume 47, Issue 6
  • December 2012, pp. 1215-1246

The Principal Principle

  • Sanjiv R. Das (a1)
  • DOI:
  • Published online: 04 October 2012

I analyze optimal loan modification schemes in a stochastic home price and stochastic interest-rate environment. Lenders maximize loan values by managing the borrower’s option to default on the loan and prepayment option. Given negative equity, controlling for the borrower’s ability to pay, rate reductions and maturity extensions result in a higher probability of redefault by homeowners even after modification of their loans. In contrast, loan write-downs (the Principal Principle), not a favored recipe, are value maximizing for the lender. A shared-appreciation mortgage enhances the ability to pay, mitigates adverse selection, and reduces the present value of expected deadweight foreclosure costs.

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Journal of Financial and Quantitative Analysis
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