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Fannie Mae, Freddie Mac finally set to reduce mortgage balances

WSJ: FHFA approves principal reduction plan

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After years of speculation and equivocation, Fannie Mae and Freddie Mac will begin to cut the mortgage balances for a number of homeowners later this year, according to a report from The Wall Street Journal.

The Wall Street Journal report, written by Joe Light, states that the Federal Housing Finance Agency recently approved a plan for the government-sponsored enterprises to engage in principal reduction on a large scale for the first time since the housing crisis.

For years their leaders claimed this would never happen. They all said the GSEs were in conservatorship, not receivership, and so a reduction in asset values would be counterintuitive to that status.

Perhaps this is why the scale of the reduction program is not as significant as some might expect, as Light reports.

From the WSJ:

Fewer than 50,000 “underwater” homeowners, who owe more than their homes are worth and are already behind in their mortgage payments, will likely be eligible, people familiar with the matter said.

Fannie and Freddie—which don’t make mortgages but rather buy them from lenders and wrap them into guaranteed securities—would also forgive principal only in cases where they determine the companies would lose less money with that option than foreclosure or other foreclosure-prevention methods. In addition, the new program will likely be limited to mortgages whose outstanding principal balance is under a certain dollar amount, people familiar with the matter said.

According to Light’s report, the plan will be officially announced “within the next few weeks.”

The issue of principal reduction has long been a hot button for many housing industry participants and observers alike.

Nearly four years ago, Ed DeMarco, who was the acting director of the FHFA at the time, said that the FHFA was not going to engage in principal reductions, despite the urging of then-Treasury Secretary Tim Geithner.

"I am concerned by your continued opposition to allowing Fannie Mae and Freddie Mac to use targeted principal reduction in their loan modification programs," Geithner said in 2012. "In view of the clear benefits that the use of principal reduction by the GSEs would have for homeowners, the housing market and taxpayers, I urge you to reconsider this decision."

But DeMarco refused Geithner’s request, stating at the time: "Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today.”

As Light writes, when Melvin Watt took over as the official director of the FHFA in 2014, some thought that Watt would move quickly to cut mortgage principal, but Watt took a “slower, more-measured approach” to considering principal reduction.

Watt was still “considering” principal reduction in February 2015, when he said that even if the FHFA was going to allow principal reduction, it would likely end up being on a much smaller scale than some people expect.

If the agency does decide to allow debt cuts for some borrowers, “I think it will be substantially narrower than the vision people have,” Watt told Bloomberg at the time. “Reducing everybody’s principal would cost taxpayers billions.”

As Light writes, Watt’s measured approach rankled some on the left, notably Sen. Elizabeth Warren, D-Mass., who launched an offensive on Watt during a November 2014 hearing on Capitol Hill.

“I’ve asked about this repeatedly and you’ve said you’d look into allowing Fannie and Freddie to engage in principal reduction; you said it again today,” Warren said at the time. “You’ve been in office for nearly a year now and you haven’t helped a single family, not even one, by agreeing to a principal reduction. So I want to know why this hasn’t been a priority for you. The data are there.”

But now, it appears that Watt has relented on principal reduction, albeit on fewer homeowners than might have been expected.

Light’s report states that roughly 50,000 borrowers would be eligible for principal reductions under the FHFA’s plan, but the most recent data from CoreLogic showed that there are still 4.3 million properties with negative equity.

So this program will help some, but not many of those that are currently underwater on their homes.

With home prices continuing to increase, according to the FHFA’s own data, could this program be a trial balloon with more reductions to come or just a one-off? Inquiring minds want to know.


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