Loan modification
Asset-Backed Securities glossary · Asset Specific Nuances
Definition
Contractual change to a delinquent loan's terms (rate cut, term extension, principal forgiveness) to improve collectibility while reducing immediate cash flow to the trust.
Loan modification in plain English
When a borrower falls behind on a loan, sometimes the smartest move isn't to seize their house but to rewrite the deal so they can actually pay, maybe a lower interest rate, more years to pay, or even forgiving part of what they owe. That's a loan modification: changing the contract terms to rescue a struggling loan. The trade-off is that the pool of investors funded by that loan now receives less cash right now, in exchange for a better shot at getting paid something over time rather than nothing. It's like a landlord cutting a reliable-but-strapped tenant's rent for a few months instead of evicting them and gambling on finding someone new.
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