Principal reduction for underwater homeowners not off table, official testifies
By Dina ElBoghdady November 19
One of the mortgage industry’s most influential regulators told a Senate panel Wednesday that a controversial form of debt relief for borrowers who have no equity left in their homes is “not off the table.”
But that was not good enough for one lawmaker, who wanted to know why the director of the Federal Housing Finance Agency (FHFA) has not acted sooner to help “underwater” homeowners who owe more on their mortgages than their homes are worth, leaving them vulnerable to foreclosure.
Mel Watt, the director, said he has been trying to figure out whether there is a way to responsibly help struggling underwater borrowers by reducing the size of their loans, a type of relief known as “principal reduction.” But he said the issue is a tough one, “perhaps the most” difficult he has faced since becoming the overseer of the mortgage giants Fannie Mae and Freddie Mac in January.
Sen. Elizabeth Warren (D-Mass.) challenged him. “You’ve been in office for nearly a year now,” she said, “and you haven’t helped a single family, not even one, by agreeing to a principal reduction, so I want to know why this hasn’t been a priority for you.”
The short but heated exchange is the latest sparring over an issue that’s been a political hot potato since the housing market unraveled and home prices plunged. Millions of homeowners saw the equity in their homes vanish, and they could not refinance or sell their way out of trouble. Some lost their homes to foreclosure.
Mel Watt, director of the Federal Housing Finance Agency. (Andrew Harrer/Bloomberg News)
The Obama administration pressed for Fannie and Freddie to allow principal reductions through the government’s main foreclosure-prevention initiative, known as the Home Affordable Modification Program. In 2012, the Treasury Department even offered to pay the two mortgage giants to participate, to no avail.
The FHFA, under Watt’s predecessor, feared that such relief would entice homeowners to intentionally default on mortgages in a bid to get cheaper loans. The agency also warned that such relief could be costly for taxpayers, who had already spent billions of dollars to bail out Fannie and Freddie after the government took control of them at the height of the financial crisis in 2008.
The debate has not advanced much since then, but many housing advocates who support principal reduction hoped they would have an ally at the FHFA once Watt joined the agency. Toward the end of his two decades as a congressman from North Carolina, Watt pushed for targeted principal reduction for troubled borrowers. But as a regulator, he has declined to stake a public position on the issue, and that did not change Wednesday.
At the Senate Banking Committee hearing, Warren did not let up, interrupting Watt more than once as she pressed him to take action.
“You’ve done a whole list of really tough technical things, and I applaud you for doing that,” Warren said. “But people have lost their homes in the past year, and every day that you delay, more families lose their homes. There are 5.4 million families out there underwater, so I want to know, when are you going to have an answer on this?”
Watt’s response: “It won’t be as long as it has been — let me put it that way.”
Fannie and Freddie do not make loans. They buy them from lenders, package them into securities and sell them to investors. For a fee, they guarantee the mortgages and pay investors if the loans default. Mortgage lenders that want to sell loans to the two mortgage giants must abide by their rules.
The head of the agency overseeing Freddie Mac and Fannie Mae says principal reductions are still possible for underwater homeowners . (Reed Saxon/AP)
Only some of the loans that are underwater are backed by Fannie and Freddie, and Watt said 75 to 80 percent of the people whose mortgages are underwater are still paying the loans. Watt insisted that his agency is allowing the two companies to take part in arrangements that may not be called “principal reduction” but have the same effect.
In August, for instance, Freddie agreed to sell a chunk of its most troubled loans to an unnamed investor. That investor can reduce the size of the borrowers’ mortgages if it chooses.
More recently, Fannie allowed a couple in California to buy back their home at its fair market value after it slipped into foreclosure in 2010, an arrangement that amounts to a principal reduction because it left the couple with a smaller mortgage.
Jaime and Juana Coronel had been living in their Los Angeles-area home for 20 years when Jaime Coronel’s landscaping work dried up during the recession and they fell behind on their mortgage payments. Fannie let them rent the property for a few years but tried to evict them when it wanted to sell the house.
The couple refused to budge and asked to buy back the home, a plight detailed in The Washington Post in July. After much wrangling, Fannie agreed, and the Coronels purchased the home for $280,000. The deal closed two weeks ago, according to the Alliance of Californians for Community Empowerment, which has been helping the couple.
“What we want is for this to become a nationwide policy,” said Peggy Mears, a community organizer at ACCE. “There’s no reason why it shouldn’t.”