The government regulator responsible for Fannie Mae and Freddie Mac announced a “one-time” offer Thursday to cut the principal remaining on the loans of some underwater homeowners.
The program comes much later and will be far smaller than advocates of housing relief had hoped for, and it reverses a four-year-old decision by the agency not to offer such principal reductions.
Mel Watt, the director of the Federal Housing Finance Agency, said the program “will allow an opportunity for delinquent, underwater borrowers in these areas to avoid foreclosure and save their homes.”
Principal reductions will be available to borrowers whose loans are owned or guaranteed by Fannie or Freddie, have less than $250,000 in debt, are at least 90 days behind on payment and whose loan balances are at least 115 percent of the value of their home. Only 33,000 people will fit those criteria, according to the agency’s estimates.
Watt said the plan was consistent with the agency’s mandate to conserve the value of the companies, which was the logic his predecessor Ed DeMarco cited in opting not to implement such a program.
Speaking to the critics, especially congressional liberals who have faulted him for not acting sooner, Watt acknowledged that “this plan will no doubt be viewed by some as too small and too late and viewed by others as too large and unnecessary.” But it is a “win-win” for the government and for borrowers, he added.
Mark Warner, the Virginia Democrat who has pushed reform of Fannie and Freddie as a member of the Senate Banking Committee, called Watt’s move “long overdue,” but said that he welcomed “this tailored approach, which will bring essential relief for struggling American families.”
DeMarco was harshly criticized in 2012 for declining principal reductions, with some liberal commentators arguing that President Obama should have sought to fire him.
Republican Jeb Hensarling, however, cited DeMarco’s analysis that principal reductions would be risky in criticizing Watt’s move. The chairman of the House Financial Services Committee warned that Watt “is helping Washington roll the dice again with another scheme founded on perverse incentives. Principal reductions exacerbate the same moral hazard problems that left taxpayers holding the bag for the government’s failures.”
Since DeMarco’s 2012 decision, the pressure for the agency to act has diminished as home values have recovered and the number of homeowners underwater and behind on their loans has fallen. The improvement in the housing market means that there is less potential macroeconomic benefit to a program offering relief to borrowers, but also that the downside risk to the government’s coffers is lessened.
During the depths of the housing crisis, 4 percent to 5 percent of the loans backed by the government-sponsored enterprises were seriously delinquent. Around 3.5 percent still were at the time DeMarco made the decision against principal reductions. In the most recent data, only 1.55 percent of Fannie mortgages were seriously delinquent, and 1.32 percent for Freddie.
The plan weighed by DeMarco would have affected as many as 700,000 borrowers, compared to the 33,000 estimate for Watt’s version.
