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FHFA principal reduction plan garners mixed reaction from housing industry

Some love it, others not so much

It’s only been a short time since the Federal Housing Finance Agency shook up the housing industry by announcing plans for government-sponsored enterprises Fannie Mae and Freddie Mac to begin offering principal reductions to certain borrowers.

But reactions from both sides, those in favor of the FHFA’s plans and those against it, are beginning to trickle in.

And here they are.

Some in the housing industry love it, some believe that the FHFA's plan doesn't go far enough, while others are concerned that the program sets a "dangerous precedent."

The FHFA’s principal reduction plan is not as widespread as some thought it might be, but approximately 33,000 borrowers will be eligible to participate in the principal reduction program.

“This plan will no doubt be viewed by some as too small and too late and viewed by others as too large and unnecessary,” FHFA Director Mel Watt said of the plan.

“However, the plan is consistent with FHFA’s statutory obligation to ‘maximize assistance for homeowners’ by providing some borrowers what could well be their final opportunity to avoid foreclosure,” Watt continued.

“It is also consistent with our statutory obligation to provide this assistance in ways that we reasonably expect will not have adverse economic consequences for the Enterprises,” Watt said. “By meeting both of these statutory obligations, the program satisfies my commitment to implement a principal reduction plan only if we could structure one that would be a ‘win-win’ for both borrowers and the Enterprises.”

David Stevens, the president and CEO of the Mortgage Bankers Association, said that the MBA is pleased with the FHFA’s plan.

“FHFA has a difficult challenge in trying to help underwater homeowners in some of the markets that are still struggling, as they need to balance the moral hazard risk, identify loans that do not add risk to the GSEs or the communities involved, and focus on borrowers that will have the best chance to stay current,” Stevens said.

“FHFA’s program design attempts to mitigate some of these concerns and the result is a narrow focus on lower loan balance and severely delinquent mortgages,” Stevens continued.

“Hopefully this targeted program will help some families who can meet these requirements,” Stevens concluded. “Servicers have been actively working to help borrowers through HAMP and other modification programs and this provides them another tool with which to do so, although it is important that consumers understand that FHFA and the GSEs will be identifying borrowers for eligibility.”

New York Attorney General Eric Schneiderman, who recently called on the FHFA and Watt to enact a principal reduction program, said that the feels the FHFA’s announcement is an “important first step” but says that the program doesn’t go far enough and will push for an expansion.

“I commend Director Watt for taking this important first step,” Schneiderman said.

“The program announced today will help thousands of American families victimized by the housing crash get the relief they need to keep their homes,” Schneiderman continued. “But while today’s announcement is a good start, much more needs to be done.”

According to Schneiderman, in New York alone, nearly 60,000 families with mortgages backed by Fannie Mae and Freddie Mac were in default and at risk of foreclosure as recently as 2013.

“The program announced by FHFA today will help roughly half that number nationwide, and the program’s participation requirements will disqualify thousands of New Yorkers in many areas hardest hit by the foreclosure crisis,” Schneiderman said. “I look forward to working with housing experts and advocates in the coming weeks and months to urge the FHFA to build on today’s important announcement and expand this program to benefit all of those who need mortgage debt relief.”

John Taylor, the president and CEO of NCRC, shared Schneiderman’s sentiments.

“We applaud FHFA and Director Watt for taking this important step in the right direction,” Taylor said.

“The new principal reduction modification program will help certain underwater borrowers avoid foreclosure and stay in their homes,” Taylor continued.

“That’s a very positive thing. That said, with the scope announced today, this program will have limited impact,” Taylor said. “This represents the first bite at the apple. Hopefully this program will serve as a model for what can be done with the larger portfolio of delinquent loans that could be modified at Fannie Mae and Freddie Mac.”

Sen. Mark Warner, D-VA, a member of the Senate Banking Committee and a long-time advocate for GSE reform, welcomed the plan.

“While a principal reduction program at FHFA for underwater mortgages is long overdue, I welcome this tailored approach, which will bring essential relief for struggling American families,” Warner said.

On the other hand, the National Association of Federal Credit Unions said that the FHFA’s plan sets a “dangerous precedent” and worries what it may lead to.

“We fail to see how principal reduction will do anything to strengthen the housing market,” NAFCU President and CEO Dan Berger said. “NAFCU has always supported protecting consumers, but we believe principal reduction sets a dangerous precedent. Credit unions have a strong history to doing everything they can to keep members in their homes.”

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