After sparking hopes that many Americans might see some of their mortgage debt eliminated because they owe more than their home is worth, the director of the Federal Housing Finance Agency said Wednesday any such actions would be narrow in scope.
Liberal Democrats such as Massachusetts Sen. Elizabeth Warren have blasted FHFA Director Mel Watt, a former North Carolina congressman, for failing to more aggressively seek what’s known as principal reduction. His nomination had been held up by Republicans, in part out of concerns that he’d force mortgage-finance titans Fannie Mae and Freddie Mac to side with borrowers and force banks to partially forgive loans.
In one of his few interviews since taking the helm of Fannie and Freddie’s regulator in early 2014, Watt said despite the criticism from fellow Democrats he continues to weigh a principal-reduction program of limited nature. He reminded a small group of reporters that 85-90 percent of borrowers who owe more than their home is worth_ commonly referred to as being underwater on their loan_ continue to make payments.
“You don’t want to encourage those people to default on their mortgages,” said Watt, noting that principal reduction has to happen only in cases where the borrower can’t pay now but could and then would with a reduction. “We’re kind of walking a tightrope here.”
States that were at the epicenter of the housing crisis, such as Florida and California, also had the highest percentages of underwater borrowers. In the seven years since the housing crisis began, many of those borrowers lost their homes to foreclosure or received mortgage modifications that either changed loan terms or in a limited number of cases banks actually reduced the amount owed.
Proponents of principal reduction insist it that if Fannie and Freddie required it, roughly 500,000 homeowners would benefit and it would save Fannie Freddie about $4 billion by not having these loans go bust. Fannie and Freddie, which purchase mortgages from lenders and pool them into bonds, either own or guarantee more than half of outstanding U.S. mortgages.
The agency continues to study details such as how many borrowers would still default on their loans after a reduction, said Watt, noting that FHFA’s mission by statute is to ensure that Fannie and Freddie, in government conservatorship since 2008, remain profitable.
“The statute is also clear that we can make less profit on some loans than we make on other loans,” said Watt, suggesting that some limited reduction of principal for loans held by Fannie and Freddie is mission-consistent.
Pressed on a time-frame for a decision, Watt would not give one, saying only that “it was not an easy analysis.”
He did, however, give an early spring timetable for a decision on whether to change the fees that Fannie and Freddie charge lenders to guarantee mortgages.
Watt suspended an increase in fees that was planned by his predecessor, who had argued they were necessary to offset risks. But just last week Watt told the House Financial Services Committee he’d still made no decision on whether to raise or lower the fees from their current level.
“You obviously don’t want to charge excessive … fees,” Watt said Wednesday.
The FHFA director also deflected criticism of plans to allow Fannie and Freddie to purchase loans from lenders given to borrowers with down payments of just 3 percent. These loans will be to stronger borrowers who’ve had housing counseling and will pay adequate mortgage insurance, Watt insisted, adding that “it will be a small percentage of the overall portfolio.”
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