FHFA to Get Off the Fence on Principal Relief

In a speech Tuesday at the Women in Housing and Finance Public Policy Luncheon in Washington, D.C., FHFA Director Mel Watt said he expected to make an announcement in the next 30 days on whether or not the Agency had found a “win-win” solution for principal reduction—or if they would take principal reduction off the table entirely.

Watt noted that the FHFA has been substantially criticized both before and since he became FHFA Director for not including principal reduction as part of its loss mitigation strategy. One of the factors to consider, Watt said, is balancing the declining number of seriously delinquent borrowers with the “significant operational complexity” and the cost to the GSEs and servicers of implementing a principal reduction program.

There is also the issue of conservatorship—while the GSEs remain in conservatorship of the FHFA, taxpayers remain on the hook. Watt said in a speech last month at the Bipatisan Center in Washington, D.C., that Fannie Mae and Freddie Mac face risks that are “certain to escalate” the longer the conservatorship continues—namely, the requirement that the GSEs’ capital should be reduced to zero by 2018, which puts the GSEs at risk of another taxpayer-funded bailout.

“It would not be an overstatement to say that (whether to offer principal reduction) has been the most challenging evaluation the Agency has undertaken during my time as Director,” Watt said on Tuesday. “We are, however, drawing close to the end of this difficult process, and I expect to announce a decision within the next 30 days about whether we have been able to find a 'win-win' principal reduction strategy or whether, on the other hand, we will take principal reduction off the table entirely. So, while I don't have an answer today, I invite you to stay tuned for more on this in the near future. As always, our decision and the reasons for making it will be documented and transparent.”

Some in the industry were skeptical that such a "win-win" strategy could be found in the area of principal reduction. Carrie Hunt, EVP of Government Affairs and General Counsel for the National Association of Federal Credit Unions, said, “It is hard to envision a scenario where principal reduction would result in a win-win for the marketplace overall. NAFCU strongly supports protecting consumers, but principal reduction sets a dangerous precedent. Credit unions have a strong history of doing everything possible to keep members in their homes.”

Watt’s address centered on lessons learned from the foreclosure crisis and the agency’s initiatives to assist distressed borrowers, including non-performing loan sales, which began in 2014 and have resulted in the selling of more than 29,000 mortgages that were an average of 3.1 years delinquent with an aggregate unpaid principal balance of $5.8 billion.

“Selling these seriously delinquent loans to new owners is a way to create a fresh start for loss mitigation purposes,” Watt said. “Purchasers of these loans have a financial interest in working with borrowers to avoid foreclosure and to help borrowers re-perform on their mortgage. The new owners generally contract with specialty servicers that have extensive experience and better track records at offering loss mitigation solutions to seriously delinquent borrowers, and we believe they will be more likely to get better results. Given the impasse with the prior servicer, borrowers may be more likely to respond to outreach and loss mitigation solicitations by a new servicer using new techniques.”

Watt also mentioned the Agency will try to make extensive efforts to reach the 360,000 borrowers eligible for the Home Affordable Refinance Program (HARP), which is set to expire at the end of this year. To date, more than 3.3 million homeowners have refinanced through HARP.

He also mentioned Treasury’s Home Affordable Modification Program (HAMP), which is also set to expire at the end of the year. Watt said that FHFA is “working with the Enterprises, the servicing industry, consumer groups, and other stakeholders to develop post-HAMP loan modification options for borrowers. We want to build on the success of our recent symposium, and we will continue to have further conversations and discussions with stakeholders.”

Click here to read the full text of Watt’s speech.