FHFA [1] Director Mel Watt has been talking about mortgage debt reduction for underwater borrowers who have mortgages backed by Fannie Mae [2] and Freddie Mac [3] almost since he took over that position in January 2014.
Housing advocates and Democratic lawmakers have been pressuring Watt to offer some sort of principal mortgage reduction for underwater borrowers since Watt took office. Offering debt reduction to homeowners on GSE-backed loans would be highly controversial because taxpayers remain on the hook for Fannie Mae and Freddie Mac loans while the GSEs remain in conservatorship. More than two years into his tenure as FHFA Director, Watt has still not made a move or a policy change regarding principal forgiveness.
The Wall Street Journal reported on Monday [4], citing "people familiar with the matter," that FHFA had approved a plan to cut mortgage balances for thousands of eligible homeowners. When contacted by DS News, the FHFA did not confirm or deny the Wall Street Journal story; an FHFA spokesperson did, however, tell DS News on Monday that “The issue of debt reduction is still under consideration and we’re looking for a responsible solution.”
The FHFA decided not to offer principal forgiveness to homeowners under the direction of Watt's predecessor, Ed DeMarco, according to an announcement in July 2012 [5], the FHFA's website said.
"FHFA announced that after extensive analysis of the revised Home Affordable Modification Program Principal Reduction Alternative, including the determination by the Treasury Department to begin using Troubled Asset Relief Program monies to make incentive payments to Fannie Mae and Freddie Mac, we concluded the anticipated benefits do not outweigh the costs and risks," FHFA said in the July 2012 announcement. "We concluded the HAMP (Treasury's Home Affordable Modification Program) alternative program did not clearly increase foreclosure avoidance while reducing costs to taxpayers relative to the approaches currently in place."
Watt has been reluctant to offer principal forgiveness due to the risk it poses to taxpayers, despite pressure from lawmakers and housing advocates. Senator Elizabeth Warren (D-Massachusetts) in particular drilled the Director in a Senate Banking Committee hearing in November 2014. Watt told the committee at that time regarding principal forgiveness that "We have to do this in a way that is responsible, otherwise we just reduce principal for everybody across the board."