After two years of closely studying principal reduction on residential loans backed by the government-sponsored enterprises, the GSEs’ regulator says a decision is coming soon.
Back in 2013 when Melvin L. Watt was nominated by President Barack Obama to be director of the Federal Housing Finance Agency,
principal reduction was a hot-button issue.
Although his predecessor, Edward J. DeMarco, showed no interest in considering cutting loan balances on distressed GSE loans, Watt had expressed support for such a strategy.
He was among 19 members of the House who
signed a letter sent to Obama in December 2012 calling for principal reduction on loans owned or guaranteed by Fannie Mae and Freddie Mac.
But there has been no movement on the issue since he was confirmed by the Senate as FHFA director in December 2013.
However, in a
speech Tuesday at the Public Policy Luncheon: Women in Housing and Finance, Watt brought up GSE principal reduction, according to a copy of his prepared remarks provided by FHFA.
He noted that
FHFA has been the recipient of substantial criticism, both before and since he became FHFA director, for not allowing the pair of secondary lenders to offer principal reduction as a part of their loss mitigation strategy.
“For the two years that I have been the director, FHFA has been methodically studying this issue,” Watt explained. “My objective, as I have said on numerous occasions, has been to determine whether we could find a ‘win-win’ strategy employing principal reduction that would benefit both borrowers and the enterprises.”
He noted that
an extremely complicated set of factors have delayed a final resolution on the issue.
Among those factors is balancing a declining number of distressed, underwater
borrowers with the cost and complexity for the GSEs and servicers to implement such a program.
“It would not be an overstatement to say that this has been the most challenging evaluation the agency has undertaken during my time as director,” Watt stated.
He said that an announcement on a decision is expected within the next 30 days about whether a “win-win” strategy has been found or whether the idea of GSE principal reduction will be abandoned altogether.
Among those who oppose principal reduction are credit unions.
“It is hard to envision a scenario where principal reduction would result in a win-win for the marketplace overall,” National Association of Federal Credit Unions Executive Vice President of Government Affairs and General Counsel Carrie Hunt said in a written statement. “NAFCU strongly supports protecting consumers, but principal reduction sets a dangerous precedent.”
