FHFA’s Watt Says Debt Cuts Possible for Underwater Homeowners

Mortgage & Real Estate

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Fannie Mae and Freddie Mac’s overseer wants to allow debt cuts for a narrow group of borrowers who owe more than their homes are worth. The trick is figuring out a way to do it without incurring costs for taxpayers.

Federal Housing Finance Agency Director Mel Watt told reporters Wednesday that he is still studying the idea of reducing principal on properties with depressed values, a step backed by housing advocates and Democratic lawmakers.

Watt, a former Democratic congressman who has been in the FHFA job for just over a year, met with reporters for a broad discussion of his policies, which apply to the more than half of home loans backed by Fannie Mae and Freddie Mac.

If the agency does decide to allow debt cuts for some borrowers, “I think it will be substantially narrower than the vision people have,” Watt said. “Reducing everybody’s principal would cost taxpayers billions.”

About 5.1 million homeowners, one in ten of those with a mortgage, had negative equity in the third quarter of last year, according to data from CoreLogic Inc., a number that has been declining as home prices have recovered. Congress could pass a tax break if lawmakers want to aid underwater borrowers, Watt said.

FHFA took a preliminary step toward allowing debt cuts in November by letting borrowers who have gone through foreclosure repurchase their homes at market prices.

Fannie Mae and Freddie Mac have operated under U.S. conservatorship since they were seized during the 2008 credit crisis. They’re required to send all of their profits to the U.S. Treasury under terms of their taxpayer-funded bailout.

Shareholders in the two companies have asked Watt and Treasury officials to change the terms of the agreement so that the companies can retain some of their profits. Watt said he has no plans to initiate discussions about doing that.

“I don’t know that I perceive it’s my responsibility to start that conversation,” he said. “I inherited a set of agreements. I know why they were put in place, basically as a quid pro quo for rescuing Fannie and Freddie.”

Watt also said he has no plans to expand the terms of the Home Affordable Refinancing Program, which allows borrowers with loans backed by Fannie Mae and Freddie Mac to refinance into lower interest rates even if their homes have lost value. The program is set to expire at the end of this year.

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