FHFA’s Watt Signals Decision Soon on Principal Reduction

The Federal Housing Finance Agency will announce within the next month whether it will implement a limited principal reduction program for underwater borrowers with mortgages backed by Fannie Mae and Freddie Mac, FHFA Director Mel Watt said today.

Watt’s predecessor, Edward DeMarco, had ruled out principal reductions, but Watt has been examining the issue since taking the helm at FHFA two years ago. “This has been the most challenging evaluation the agency has undertaken during my time as director,” he said. “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.”

The decision will need to balance the trend of declines in the number of underwater borrowers with the sizeable pockets of underwater mortgages that persist in certain areas and among certain racial or ethnic groups, Watt said. In addition to the pending decision on principal reductions, Watt signaled that FHFA will offer a refinancing program for borrowers with high loan-to-value ratios to replace the Home Affordable Refinance Program when it expires at the end of the year.