Back to: BANKING, LENDING, & CREDIT INDUSTRY
Write-Down (Mortgage) Definition
A mortgage write-down is when a lender reduces the mortgage loan’s principal amount a borrower owes. It is the borrower who initiates the write-off process. He or she persuade the lender to write off a certain percentage of the loan initially given to him or her to purchase a house.
A Little More on What is Write-Down of a Mortgage
Mortgage write down is an alternative for those borrowers who are struggling financially and do not want the lender to initiate a foreclosure on their houses. The borrower usually writes to the lender demonstrating his or her inability to pay back what he or she borrowed. The persuasion is always a plea to the lender to reduce the mortgage loan’s principal amount.
However, for a borrower to convince a lender to write off part of a mortgage loan given to him or her is always not an easy task. Before a lender decides to write down a mortgage loan, the borrower must have convincing proof of his or her inability to repay the loan.
Note that a lender may be willing to initiate a mortgage write down if a borrower loses his or her source of income like a job or an investment. However, the borrower must give the lender tangible proof indicating a reduction in income or financial difficulties. Some of the documents that a borrower can give to the lender as proof include the following:
- Paycheck stubs showing wage reduction
- Copies of termination letter
- Bank account recent statements
- Credit card bills
How to Secure a Mortgage Write Down
The lender’s average foreclosure cost is usually $50,000. So, if as a borrower you are not willing to lose your home to foreclosure, then a mortgage write-down may remain your last option. All you need to do is to convince the lender to approve your write down a request.
The first step is to write down a hardship letter spelling out all of your financial hardships. The financial hardship should be genuine and able to move the lender to take action. Examples of financial problems you can mention in the letter may be as follows:
- Loss of a job or other source of income such as investment
- Illness or injury and, therefore, making you unable to work
- Reduction of your wages by the employer due to tough economic situations
- Copies of doctor and hospital bills
In case your mortgage writes down request gets approved, what a lender does is to slash a certain percentage of the principal balance you owe. The initiation of a mortgage write-down leads to a reduction on your monthly mortgage payment. It basically reduces the loan burden the borrower is facing.
The assumption is that when the principal amount reduces, it enables the borrower to meet the loan obligation without straining financially. The move eventually prevents the possibility of the borrower defaulting on the loan.
There are two methods a lender can use to reduce the borrower’s loan principal balance upon approval. The first method is that a lender may directly reduce the principal amount.
The second method is where a lender reduces the principal amount through a government program known as federal government affordable modification program. The program gives financial incentives to lenders who agree to do modification on home loans, especially for those struggling homeowners. The lenders who agree to this program provide the following relief to the borrowers:
- Slashes the interest rates on the mortgage loan
- Revise the terms of the principal amount to reduce the burden of loan repayment
Generally, as a borrower, you need to seek the opinion of your mortgage lender about the program. Your lender should tell you whether or not it is willing to participate in the program. Nonetheless, as a borrower, you are not eligible to participate in this program if your mortgage loan is either guaranteed or under the ownership of Freddie Mac or Freddie Mac.
The Bottom Line
Generally, banks do not agree to mortgage write down unless the situation is extremely bad. For instance, a bank can only approve after it has completely squeezed every cent from the borrower. Also, after it is sure that the borrower has no other hidden asset in his or her name that can be used to settle the loan.
References for Write Down
Academic Research on Writing Down Assets
- Write–down of long-term assets: The reflection of fair value or the action of earnings management?[J], Yuetang, W., Xue, Z., & Li, Z. (2005). Write-down of long-term assets: The reflection of fair value or the action of earnings management?[J]. Accounting Research, 8, 31-35. Compared with short-term assets,long-lived assets are employed longer and it is more difficult to decide their fair value,so the application of impairment policy has an enormous impact on the performance of the company and the subjectivity is pervasive in the process.It is worth researching that how the long-lived asset’s write-down policy set out in the Accounting System for Enterprises has been implemented,what effect the retro-adjustment policy has had on the impairment of the company and whether the write-downs have reflected the perspective of the future profit ability of long-term assets or they are just the behavior of earnings management.The result finds that Chinese listed companies wrote down impaired long-term assets at large in the year of the launch of the policy and the total amount of the write-offs really reflected the decline of their future profit ability,and the amount retro-adjusted to the current year’s earnings also have the same reflection.It is verified that retro-adjustment provides the policy path for the companies to tamp long-term assets and reflect the true value of them.
- Write‐Down Timeliness, Line‐of‐Business Disclosures and Investors’ Interpretations of Segment Divestiture Announcements, Collins, D., & Henning, S. (2004). Write‐Down Timeliness, Line‐of‐Business Disclosures and Investors’ Interpretations of Segment Divestiture Announcements. Journal of Business Finance & Accounting, 31(9‐10), 1261-1299. This paper examines investors’ anticipation and subsequent interpretations of asset write‐downs accompanying segment divestitures. Examining long‐window returns cumulated over the two years preceding the year of divestiture, we hypothesize and find that investors anticipate write‐downs of segment operating assets before divestiture and recognition occurs, with anticipation conditional on the timeliness of the write‐down and prior disclosure of the segments’ operating results under segment reporting rules. Short‐window returns cumulated over the three days surrounding the announcement of the divestiture confirm that investor interpretations of asset write‐downs are similarly contingent on write‐down timeliness and prior disclosure.
- Inventory write–down prediction for semiconductor manufacturing considering inventory age, accounting principle, and product structure with real settings, Wu, J. Z. (2013). Inventory write-down prediction for semiconductor manufacturing considering inventory age, accounting principle, and product structure with real settings. Computers & Industrial Engineering, 65(1), 128-136. The International Financial Reporting Standards (IFRS) No. 2 has been the worldwide accounting principle for the reduction of inventory to market allowance since January 1, 2005. Using make-to-stock manufacturing strategies and inventory accounting for only approximately 14% of the total costs, integrated device manufacturers have found maintaining robust records for financial statements increasingly difficult. For example, one company in the case study conducted in this study must write-down losses of 2–100% of the total inventory costs for products with inventory ages of 18 months–3 years. However, the average cycle time for producing flash memory is approximately 3 months. In other words, when the system variation and safety stock policy are considered, the company must write-down the reduction of inventory to market allowance for most of work-in-process inventory. However, little research has been done to addressing the practical management of operations according to inventory aging processes. This study develops a polynomial-time-based model to obtain significant features, including inventory ages, accounting principles, and product structures (bill of material), for the accurate prediction of inventory write-downs to reduce the impact of the carrying value fluctuation of inventory. An empirical study was conducted on a Taiwanese semiconductor manufacturer. The results show that predicting 3-month inventory write-downs of a complete flash memory production line comprising approximately 8500 product types can be conducted in less than 10 s, with the mean absolute percentage error (MAPE) less than 3.5%. Discussions regarding the sensitivity analysis and cost tornado diagrams suggest the priority of affecting factors. The results show the viability of implementing the proposed model to predict inventory write-downs in the semiconductor manufacturing industry.
- Write–down bonds and capital and debt structures, Attaoui, S., & Poncet, P. (2015). Write-down bonds and capital and debt structures. Journal of Corporate Finance, 35, 97-119. We analyze a defaultable firm’s optimal capital and debt structures when its debt includes senior straight and Write-Down (WD) bonds. Credit events and premature or terminal bankruptcy are triggered if the firm’s asset value hits specific barriers. The optimal capital structure and the optimal straight/WD debt mix are jointly determined along with the optimal level of debt reduction. The firm increases its leverage by swapping both equity and straight debt for WD bonds. The credit spread on the straight debt is shown to be considerably lower when the firm’s capital structure also includes WD bonds, for a given global leverage.
- Using eminent domain to write–down underwater mortgages: an economic analysis, Miceli, T. J., & Pancak, K. A. (2015). Using eminent domain to write-down underwater mortgages: an economic analysis. Journal of Housing Research, 24(2), 221-236. A handful of economically distressed cities and counties are considering using their power of eminent domain to write down the principal of underwater mortgage loans. In this paper, we review the legal basis and economic impact of such government-forced loan restructuring. We develop a model of negative equity mortgage default both with and without government takings to determine if using eminent domain is socially desirable from a policy perspective. We find a trade-off between the immediate benefits of avoiding current mortgage defaults and longer term increased financing costs. The weighting of this trade-off is impacted by the determination of just compensation.
- Temporary write–down CoCos and the incentive to monitor and discipline, McCunn, A. A. (2015). Temporary write-down CoCos and the incentive to monitor and discipline. Law and Financial Markets Review, 9(2), 159-165. Contingent Convertibles (CoCos) are debt instruments that either convert into equity or are written down (cancelled) when triggered. This article argues that temporary write-down CoCos diminish the incentives of investors to monitor and discipline bank managers. This monitoring and disciplining role is an important objective of CoCos that reduces the probability of bank insolvency and consequently the magnitude of potential bailouts. For investors, temporary write-down CoCos are less risky than permanent write-down CoCos. For bank managers, temporary write-down CoCos are likely to be a cheaper source of bank financing. For regulators, temporary write-down CoCos are likely to be less effective at instilling market discipline in bank managers.
- SFAS 121 Asset Write–down: Early vs. LATE firms, Kim, S., & Kwon, S. (2001). SFAS 121 Asset Write-down: Early vs. LATE firms. Previous research shows that capital market positively values firms whose motivation is to gain production efficiency by streamlining their assets as part of their restructuring campaign. In this study, we examine 47 firms that voluntarily disclosed asset write-down information in either 10-K or ARS one year prior to the mandatory adoption of SFAS No. 121. We document the following empirical evidence: firstly, EARLY firms, pursuing production efficiency through restructuring efforts, experience more positive market reaction than LATE firms at the disclosure of asset write-down decisions, consistent with efficiency enhancement arguments. This evidence is robust to the selection of an alternative control group, matched in terms of asset size and industry classification codes. Secondly, EARLY firms incur more capital expenditures, acquire less intangibles, and exhibit lower asset turnover ratios and a shorter asset age than LATE firms. Finally, EARLY firms exhibit higher profitability, and higher effective tax-brackets than LATE firms when the voluntary decision of asset write-down is made. Previous studies that have examined the issue of asset write-down cross-sectionally aggregate the sample firms, and thus fail to recognize the different motivations behind different firms. In this paper, we enhance our analysis by employing a voluntary disclosure sample, a control sample of companies that made their asset write-down disclosures in the first fiscal year of mandatory adoption, and another control sample (MATCHED CONTROL), which did not make any asset write-down disclosures in either the voluntary year (1995) or the mandatory year (1996). We hope that this paper sheds light on the determinants that motivate firms to voluntarily disclose the asset write-down information in their 10-K reports or annual reports to shareholders one year prior to the mandatory adoption of SFAS No. 121.
- The value-relevance of asset write–down regulations in China: the roles of information relevance and measurement reliability, YANG, Z. (2003). The value-relevance of asset write-down regulations in China: the roles of information relevance and measurement reliability. This study examines empirically the effects of market volatility on the value relevance of fair values. Using the modified Ohlson model (1995) and a sample of U.S. financial companies for the period of 2008 to 2013, this study shows that fair values are priced at a significant discount when market volatility is high. Song (2013) shows analytically that the effectiveness of fair value accounting is negatively affected by market volatility. Findings of the current study suggest that investors understand the effects of market volatility on fair values and price them accordingly. The study extends the research on the determinants of the usefulness of fair values by looking beyond factors associated with the reliability of estimated fair values (Level 2 and Level 3 fair values). This study has practical implications: current accounting standards for fair value measurement acknowledge the limitations of the market as a source of fair values by offering a three-level fair value hierarchy with provisions for fair values to deviate from market prices. Findings of this study shed light on a previously little studied factor, that is, market volatility, on the usefulness of fair values.
- Inventory Write–down and Thor Power Tool, Mihalov, J. B. (1979). Inventory Write-down and Thor Power Tool. Taxes, 57, 384.
- Write Your Questions Down Before You Pay for Your Research, Cowan, C. D. (1992). Write Your Questions Down Before You Pay for Your Research. Marketing Research, 4(1), 65. The goal of a research proposal is to present and justify the need to study a research problem and to present the practical ways in which the proposed study should be conducted. The design elements and procedures for conducting the research are governed by standards within the predominant discipline in which the problem resides, so guidelines for research proposals are more exacting and less formal than a general project proposal. Research proposals contain extensive literature reviews. They must provide persuasive evidence that a need exists for the proposed study. In addition to providing a rationale, a proposal describes detailed methodology for conducting the research consistent with requirements of the professional or academic field and a statement on anticipated outcomes and/or benefits derived from the study’s completion.
- Debt, Deflation, and Debacle: Of Private Debt Write–Down and Public Recovery, Vague, R. W., & Hockett, R. C. (2013). Debt, Deflation, and Debacle: Of Private Debt Write-Down and Public Recovery.