Fannie’s and Freddie’s Plan to Cut Mortgage Balances May Be Near

Mel Watt
Mel Watt

Fannie Mae and Freddie Mac could forgive mortgage principal for thousands of borrowers under a new plan to be rolled out by their regulator, the Federal Housing Finance Agency, as soon as Thursday, according to people familiar with the matter.

The plan is likely to draw ire from consumer advocates who will think it’s not enough to address the problem, as well as from some taxpayer advocates frustrated that the bailouts keep coming years after the housing crisis ebbed.

In all, about 4.3 million borrowers owed more than their homes were worth at the end of 2015, according to real estate data firm CoreLogic, down from 12 million in 2009.

Under the plan, the existence of which was earlier reported in The Wall Street Journal, borrowers would be eligible to have some of their mortgage principal forgiven if they have a loan whose balance is less than $250,000, the people said. Borrowers would need to owe more than their homes are worth and already be at least 90 days delinquent on mortgage payments. After the reduction in principal, they still would owe 15% more than their homes are worth, the people said.

The strict parameters of the program are likely to make it much smaller than some consumer advocates, who have called for principal reduction for years, had hoped for and likely limit the number eligible for the program to fewer than 40,000 borrowers, the people said.

FHFA Director Melvin Watt in the past has said that the decision on whether to reduce borrower principal is “the most challenging evaluation the agency has undertaken during my time as director.”

Among the difficulties have been how to restrict the program in a way that taxpayers don’t lose money as a result of the reduction, how to deal with the moral hazard of forgiving debt for some borrowers but not others, and how to address concerns from mortgage servicers, which will have to implement the program.

Consumer advocates have long called for principal reduction as a way to prevent foreclosures and give owners of “underwater” homes the incentive to keep paying their mortgage and invest in their homes and neighborhoods.

Opponents of the method, however, worry that giving such breaks unfairly treat owners who remained current on their loans, and could give incentive to such owners to default down the line in the hope of getting a similar break.

The agency has studied whether or not to implement such a program for years. At a hearing in late 2014, Sen. Elizabeth Warren (D., Mass.) lambasted Mr. Watt, saying “You’ve been in office for nearly a year now and you haven’t helped a single family…by agreeing to a principal reduction.”

On Wednesday, an FHFA spokesman in an email said, “As Director Watt noted, we expect to announce a decision within the next 30 days [since March 22] about whether we have been able to find a ‘win-win’ principal reduction strategy or whether, on the other hand, we will take principal reduction off the table entirely.”

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