Reducing the principal on mortgages is “a last resort,” says Paul Koches, executive vice president at Ocwen Financial Corp., a West Palm Beach, Fla., loan servicer that has shrunk the amount owed on 10,884 delinquent mortgages as of Sept. 30. That is 23% of all the loans modified by Ocwen so far this year.

Ocwen estimates the company’s foreclosures result in an average loss of $122,000, or 59% of the loan amount. The figure has more than doubled since last year, causing Ocwen to look harder at lowering principal payments.

Early trends are encouraging. A recent study by Credit Suisse found that roughly 12% of Ocwen borrowers who had their loan balances reduced in April were at least 60 days past due five months later. In comparison, the default rate on less-aggressive loan modifications was 22% or more.

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