Fannie, Freddie to offer principal reductions for borrowers

Fannie, Freddie to offer principal reductions for borrowers
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Mortgage giants Fannie Mae and Freddie Mac will offer one-time principal reductions to certain seriously delinquent underwater borrowers to help them avoid foreclosures.

The Federal Housing Finance Agency (FHFA) on Thursday announced the long-awaited decision that is expected to assist approximately 33,000 borrowers that meet eligibility criteria. It's likely to meet with a backlash of opposition on Capitol Hill, from lawmakers on both sides of the political spectrum.

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“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 in a statement.

While the national housing market has significantly improved in recent years, there are still pockets around the country where home values have not recovered and negative equity remains a problem, Watt said. 

The plan is consistent with the FHFA’s statutory obligation to “maximize assistance for homeowners” by providing some borrowers with what could be their final opportunity to skirt foreclosure, Watt said. 

He said that assistance is given in "ways that we reasonably expect will not have adverse economic consequences for the enterprises."

Last month, Watt said the principal reduction issue had been the “most challenging" he had faced during his more than two years at the helm of the FHFA. 

Making a decision, he said, required the “consideration of an extremely complicated set of factors." 

“FHFA has received substantial criticism, both before and since I became the director, for not allowing the enterprises to offer principal reduction as a part of our loss mitigation strategy,” Watt said in a speech last month. 

An FHFA official said that in deciding to move forward with the program, the agency weighed much larger losses from foreclosures against the smaller costs of reducing a portion of mortgage principal. 

The modification will be available to owner-occupant borrowers who are delinquent by 90 days or more as of March 1, whose mortgages have an outstanding unpaid principal balance of $250,000 or less and whose mark-to-market loan-to-value ratios exceed 115 percent.

Servicers must solicit eligible borrowers no later than Oct. 15.

Former FHFA Director Edward DeMarco refused to consider principal reductions, arguing that it might cost taxpayers even more after they had already spent nearly $188 billion to save Fannie and Freddie during the financial crisis in 2008.

He also worried that the reductions would spur some homeowners to intentionally default on mortgages to lower their loan costs. 

The Obama administration had urged Fannie and Freddie to allow principal reductions through the Home Affordable Modification Program and even offered some financial incentives. But DeMarco never budged.

The FHFA also announced that it has approved further enhancements to its requirements for Freddie and Fannie’s sales of non-performing loans (NPL).

So far, Fannie and Freddie have sold more than 29,000 mortgages with a total unpaid principal balance of $5.8 billion through their NPL sales.

“The principal reduction modification program we are announcing today, along with the changes we are making to our NPL sales guidelines, will allow an opportunity for delinquent, underwater borrowers in these areas to avoid foreclosure and save their homes,” Watt said.

Officials didn't know how many homeowners might be helped by changes to that program.

Watt has said that the sale of non-performing loans, when done “the right way,” can help borrowers stay in their homes.