FHFA Considering Limited Principal Reduction

Federal Housing Finance Agency Director Melvin Watt said his agency, which regulates mortgage-finance companies Fannie Mae and Freddie Mac is attempting to find places where Fannie and Freddie can reduce mortgage balances without hurting taxpayers.

Principal reduction has long been considered by some community groups the most effective tool for preventing foreclosures and keeping homeowners in their houses. But critics contend it also creates an incentive for some to fall behind on their mortgages and hurts taxpayers.

At a congressional hearing last month, Mr. Watt said “there are some instances” where Fannie and Freddie could reduce mortgage principal without hurting the companies.

On Wednesday, Mr. Watt told reporters “I don’t think we’ve ever taken principal reduction, in some way, off the table.”

On the other hand, he said, 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.”

Mr. Watt said the threshold for any principal-reduction program would be to focus on loans where reducing principal didn’t hurt Fannie or Freddie. Principal reduction, to the extent it encourages borrowers to keep paying their mortgages, can reduce costs associated with processing foreclosures and then maintaining and selling empty homes.

Noting that most underwater homeowners still pay their loans, Mr. Watt said, “I don’t want to start encouraging those people to default…We’re walking a tightrope here.”

Fannie and Freddie don’t make loans, but buy them from lenders, package them in securities and provide guarantees to make investors whole if the loans default. The companies were put in government control in 2008 and back the bulk of mortgages currently made in the marketplace.

Mr. Watt, who started his job in January 2014, over the past year has faced pressure from some groups that want to see Fannie and Freddie loosen mortgage access while others fear the companies could be walking down a path that leads to another housing boom and bust.

At the same time, shareholders in the companies, which are still publicly traded, are suing Mr. Watt and other parts of the government for what they feel is the mistreatment of Fannie’s and Freddie’s profits. Right now, Fannie and Freddie must send almost all of their earnings to the U.S. Treasury.