Mel Watt said the regulator is considering reducing the balances of some homeowners’ mortgages, but the effort could prove to be challenging.
The Federal Housing Finance Agency (FHFA) is considering reducing the balances of homeowners with underwater mortgages, according to its director Mel Watt. However, attempting to find places where Fannie Mae and Freddie Mac can reduce mortgage balances without hurting taxpayers could prove to be challenging.
"I think it will be substantially narrower than the vision people have," Watt told Bloomberg. "Reducing everybody’s principal would cost taxpayers billions."
However, he said to the Wall Street Journal that some people, “when they say ‘principal reduction,’ they’re talking about everybody with a mortgage or underwater getting a reduction in principal. That would be extremely costly to do.”
He added that any principal reduction program would be focused on loans that didn’t hurt Fannie or Freddie.
Approximately 5.1 million properties, or 10.3%, of all homes with a mortgage were in negative equity as of the third quarter of 2014, 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.
FHFA took a preliminary step toward allowing debt cuts in November by letting borrowers who have gone through foreclosure repurchase their homes at market prices. In December, the agency announced that GSEs would begin accepting mortgages with as little as 3% down.
However, the lower down payment may not be as enticing as the recent FHA mortgage insurance premium cut because of the higher private mortgage insurance premiums charged on the loans.
The National Association of Hispanic Real Estate Professionals (NAHREP) recently said they are urging Fannie and Freddie to follow the FHA’s move. "NAHREP feels that lowering borrower costs by reducing the current excessive guarantee fees and loan level pricing adjustments at Fannie Mae and Freddie Mac are equally important in supporting the Obama administration’s stated goal of ‘preserving broad and affordable access for all creditworthy families.'”
