This essay by a Professor Emeritus from Wharton makes a lot of sense. We all know that paying extra principal on a fixed rate mortgage retires the mortgage sooner, but what about when financially responsible people have financial hardship? If the mortgage has been prepaid, then a recast will recalculate the amortization schedule, spreading the remaining principal out to the original payoff date. The result? Lower mortgage payments!
With a huge number of fixed mortgages falling delinquent, it would be a great idea to see this become a standard feature on a fixed mortgage - because it's already a feature of interest-only and adjustable rate mortgages! People who have prepaid a bit every month deserve to lower their housing costs gradually - at least once or twice during the life of a 30 year mortgage! This feature would also allow people to save more for their children's college and retirement, or just keep paying ahead towards a mortgage-free future.
Should the mortgage market continue to suffer foreclosures in enormous numbers, the government may look at ways to reduce existing mortgage payments as a way to keep more people in their homes. This can mean a forced principal write down, which would be catastriphic forr shareholders. A coordinated effort for fixed mortgage recasts to prepaid mortgage holders is a good idea to try first.
M. Woods & Associates