FHFA Seriously Considering Principal Write-Downs For Underwater Borrowers

Posted by Patrick Barnard on February 05, 2015 No Comments
Categories : Mortgage Servicing

Perhaps bowing to pressure from House and Senate Democrats, Mel Watt, director of the Federal Housing Finance Agency (FHFA), said on Wednesday that FHFA officials are seriously considering principal reductions for homeowners who are underwater on their mortgages.

However, such a program would have to be limited in scope, so as to not severely impact taxpayers, he said during a press conference.

‘I think it will be substantially narrower than the vision people have,’ Watt said, as per a Bloomberg News report. ‘Reducing everybody's principal would cost taxpayers billions.’

Whether that means partially reducing principal, accoss-the-board, or just helping certain borrowers who are ‘seriously underwater’ is yet to be decided by FHFA officials, who have reportedly been debating the topic for months. Defining the parameters of such a controversial program is expected to be a difficult task for the agency.

About 5.1 million properties, or 10.3% of all homes with a mortgage, were in negative equity as of the third quarter, according to CoreLogic. However, with home values rising, the number of underwater borrowers has been declining each year. About 273,000 homes returned to positive equity in the third quarter of 2014, bringing the total number of mortgaged residential properties with positive equity to approximately 44.6 million, or 90% of all mortgaged properties, according to the firm.

Still, CoreLogic's home price index shows that home price appreciation is slowing: In December, home values were down 0.1% compared to November. So there is a question as to whether those homeowners who are underwater currently will return to positive equity due to rising home prices. In some markets, home prices are now on the decline.

A recent report from Black Knight Financial Services shows that mortgage lenders would have to write-down about $89 billion in losses if Congress ever decides to enact legislation making across-the-board principal reductions mandatory for borrowers who are underwater.

Principal reductions on delinquent underwater mortgages held by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac alone would require up to $18 billion in relief, according to the firm's October Mortgage Monitor report.

Although Democrats see principal reductions as a means to help struggling borrowers keep their homes, and thus further stabilize the economy, Republicans point out that such a measure could result in a dangerous precedent: That the government will be expected to bailout homeowners again should home prices see another sharp decline.

The FHFA already took a step toward allowing debt cuts in November by letting borrowers who have gone through foreclosure repurchase their homes at market prices.

In addition, lenders have for years been granting certain homeowners principal write-downs when they apply for foreclosure relief through loss mitigation programs including the government's Home Affordable Modification Program.

According to the Bloomberg News report, Watt also addressed the issue of Fannie and Freddie shareholders who have been pressuring the Treasury Department to change the terms of the companies' conservatorship agreement so that the companies can retain some of their profits. Watt said he has no plan to discuss the issue, as he doesn't see it as coming under his purview as director of the FHFA.

Watt has made similar statements in the past regarding government-sponsored enterprise reform, saying he doesn't see it as FHFA's role to decide whether Fannie and Freddie should be liquidated or returned to the private market in new roles.

Watt also told reporters he has no plans to extend the Home Affordable Refinancing Program, which is set to expire at the end of this year.

Last week, Watt presented his update on the FHFA's progress before the U.S. House Committee on Financial Services.

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