With more than half of all modified loans expected to re-default in 2010, servicers are likely to increase the use of principal forgiveness, as an option to bring these continually distressed mortgages current, rating agency DBRS said in commentary yesterday. Further, the agency expects principal forgiveness to become the loss-mitigation strategy of choice this year among servicers. Despite a growing number of government-backed modifications, DBRS noted that mortgages that are more than 60 days delinquent typically also comprise more than half of modified loans on the books after six months. "[This] 50% re-default rate on modifications continues to be staggering given the income verifications and trial modifications being done by many servicers," the agency said in the commentary today. That trend shows no sign of relenting, as Amherst Securities Group noted "tragic" re-default rates in November. Laurie Goodman of Amherst has said the fundamentals of certain modification programs put them at a disposition for unsuccessful modification. The Treasury Department’s Home Affordable Modification Program (HAMP), for example, is “destined to fail” she said, as it does not address negative equity issues even after principal reduction. The use of monthly principal and interest payment reductions accounted for more than 80% of all modifications implemented in Q309, based on a DBRS study of the quarterly mortgage metrics report released by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS). The occurrence of principal reduction in more recent vintages of mortgage-backed securities (MBS) coincides with better performance than older vintages,  the agency said. And the practice is growing - accounting for 13% of all modifications in Q309, from 10% in Q209 and 3% in Q109. For this reason, DBRS said modifications that forgive mortgage debt will likely become the preferred loss mitigation strategy for servicers during 2010. DBRS also expects the US government to continue the call for large-scale loan modifications this year. The DBRS projections come despite recent indications the Administration will not include a greater reliance on principal reduction as part of its Making Home Affordable (MHA) Program of modification, refinance and foreclosure prevention initiatives. Write to Diana Golobay.