Fannie, Freddie to Cut Mortgage Balances
March 21 2016 - 9:20PM
Dow Jones News
Thousands of homeowners will be eligible to have their mortgage
balances cut under a plan approved by the federal regulator of
mortgage-finance companies Fannie Mae and Freddie Mac, according to
people familiar with the matter.
The plan approved by the Federal Housing Finance Agency marks
the first time that Fannie and Freddie will reduce mortgage
balances on a large scale for struggling homeowners since the
housing crisis erupted. But it doesn't go as far as some housing
advocates wanted.
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.
Because of the plan's restrictions, it won't have a significant
impact on the national housing market, said Moody's Analytics chief
economist Mark Zandi.
Still "it makes economic sense to do for everyone involved. It
will keep some stressed homeowners in their homes, reduce losses to
Fannie, Freddie and thus taxpayers, and could if focused, buoy some
hard pressed neighborhoods," Mr. Zandi said.
The plan could be announced within the next few weeks, the
people said.
About 4.3 million borrowers were underwater as of the end of
2015, according to real-estate data firm CoreLogic, down from 12
million in 2009. Not all those loans are backed by Fannie and
Freddie.
In the past, policy makers have explicitly rejected reducing the
principal of mortgages backed by Fannie and Freddie, which were
bailed out during the 2008 financial crisis and put into a
so-called conservatorship under the direction of the FHFA.
Conservatives and others have long worried that any program
involving principal reduction would signal to homeowners that such
steps might be used in future crises.
"Is the role of Fannie and Freddie to make sure your house
doesn't decline in value? I don't remember seeing that in the
charter," said Mark Calabria, director of financial regulation
studies at the libertarian Cato Institute.
On the other hand, supporters of principal reduction say the
tool is effective in getting some delinquent homeowners to start
paying their mortgages again, which in the long-term can save
taxpayers money. Some advocates say that the benefits can flow to
the rest of the community, as the homeowner becomes more likely to
spend to maintain their home.
"Homeowners behave differently when they feel like a glorified
renter versus when they feel like they're an owner," said Julia
Gordon, executive vice president of the National Community
Stabilization Trust, a nonprofit that works in neighborhood
revitalization.
Principal reduction at Fannie and Freddie has been debated for
years. The Obama administration's signature foreclosure prevention
program—the Home Affordable Modification Program—encouraged
mortgage servicers to reduce principal in some instances.
But the FHFA is independent of the administration and has been
slow to roll out a program. Edward DeMarco, FHFA director from
September 2009 until January 2014, wouldn't use that option, citing
the risk to taxpayers.
Mr. DeMarco, now a fellow at the Milken Institute, on Monday
said the FHFA's research in 2012 indicated lowering a borrower's
monthly payment mattered most to avoiding foreclosure and that
other methods of modifying loans were more effective than principal
reduction. Most underwater borrowers still paid their mortgages and
"we didn't want to create an incentive for them not to be current,"
Mr. DeMarco said.
Some left-leaning housing advocates hoped that Mr. DeMarco's
successor, former Democratic Congressman Melvin Watt, would move
quickly on a broad principal-reduction program. Instead, Mr. Watt
took a slower, more-measured approach, frustrating some advocates
and lawmakers.
"It has been six years since Congress created FHFA, and in all
that time, your agency has never, not once, permitted a family to
reduce its principal," said Sen. Elizabeth Warren (D., Mass.) in a
hearing with Mr. Watt in November 2014. Mr. Watt at the time said
that the agency would come up with a plan soon.
Since then, the potential impact of a principal-forgiveness plan
has greatly diminished, not just because of foreclosures but also
because of rising home values.
Write to Joe Light at joe.light@wsj.com
(END) Dow Jones Newswires
March 21, 2016 21:05 ET (01:05 GMT)
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