FHFA Considering Limited Principal Reduction

Even though his predecessor as head of the Federal HousingrnFinance Agency (FHFA) was adamant in his refusal to consider it, Melvin L. Wattrnseems receptive to allowing Freddie Mac and Fannie Mae some leeway to reduce thernprincipal balance of their troubled loans.</p

According to Bloomberg News, Watt told reporters that he isrnstudying a way to provide principal reduction to a narrow group of homeownersrnwho are underwater on their mortgages without increasing costs for U.S.rntaxpayers.  Principal reduction has beenrna principle tool used by other lenders when modifying mortgages but is notrnallowed on those in the portfolio of the two government sponsored enterprisesrn(GSEs). </p

The number of homeowners who owe more on their homes thanrnthose homes are worth has been declining steadily as home prices have risen andrnonly a subset of the estimated 5.1 million such homes remaining belong to orrnare guaranteed by Fannie Mae and Freddie Mac.   </p

If principal reduction is allowed, Wattrnsaid, “I think it will be substantially narrower than the vision people have. Reducingrneverybody’s principal would cost taxpayers billions.” </p

Edward J. DeMarco, former acting director of FHFA had lockedrnhorns with housing advocates and with several key members of the House FinancialrnServices Committee over the issue. He refused to allow Fannie Mae and FreddiernMac to participate in a Treasury Department program offering incentives tornlenders for including principal reductions in modification plans through thernHome Affordable Modification Program (HAMP.) rnThis refusal came even as FHFA released its own study showing that participationrncould save the GSEs up to $3.6 billion and taxpayers up to $1 billion while assistingrna half million borrowers.  </p

The Treasury Department reported in December that 211,000rnmodifications through HAMP had included principal reduction – 30 percent of therntotal.</p

Bloomberg said that FHFA took a first step</btoward debt cuts late in 2014, allowing borrowers who had lost homes tornforeclosure to repurchase them at market rates. </p