Cutting payments helps stave off default, but principal reduction on underwater loans and lower consumer debt levels are less effective, according to the JPMorgan Chase Institute's new study of post-crisis modifications.

"The most important finding that also would come as a surprise to a lot of people is that it's not really about the wealth effect and principal reductions for underwater borrowers; it's really about payment relief," said Diana Farrell, president and CEO of the institute.

Diana Farrell
Diana Farrell is president and CEO of the JPMorgan Chase Institute.

A 10% payment reduction resulted in a 22% reduction in the default rate, according to the study.

Mods that reduced principal on underwater loans, but did not fully restore equity, did not appear to have much bearing on whether or not a borrower defaulted. Neither did the amount of nonmortgage debt consumers had.

"Adding to the principal reduction when a loan was underwater didn't change the foreclosure picture," Farrell said.

Few borrowers have access to a resource like liquid savings, but in cases where it is available it does appear effective in staving off default, said Farrell. The findings support the effectiveness of mortgage policies that help borrowers create that kind of buffer, she said.

The study reflects anonymized data from 450,000 JPMorgan Chase customers who between July 2009 and June 2015 received first-time mortgage relief through the Home Affordable Modification Program, from a proprietary Chase modification or from a government-sponsored enterprise mod.

The use of principal reduction to make a loan less severely underwater proved largely ineffective in conjunction with these types of modifications. But it could still be useful in other situations, Farrell said.

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