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naked capitalism: The Treasury Mortgage Mod Program: Should We Hope It Doesn't Work?
by Decius at 8:43 pm EST, Mar 5, 2009

Why banks don't do principal reductions:

The big one is the difference in treatment of a mod (well, at least the principal reduction kind) versus a foreclosure. For a foreclosure, the losses go against the lowest tranches first, and then proceed to higher tranches. However, with a principal reduction, all tranches, including the AAA (or more accurately, what was once AAA) layer.