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FHFA rolls out principal-reduction program

The federal agency that oversees government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac rolled out a program on Thursday that will allow some struggling homeowners to seek a reduction on the principal owed on their mortgages.

The program is narrow in scope, however, falling short of the broad relief that housing advocates had sought.

The Federal Housing Finance Agency (FHFA) said the program will help an estimated 33,000 borrowers nationwide. It is only open to borrowers who are both severely underwater and delinquent on their mortgages.

To qualify, a borrower needs to be 90 days past due on payments and also have a mortgage balance that is at least 115 percent of what the house could fetch in a home sale.The loan balance must be $250,000 or less. Also, servicers must solicit eligible borrowers no later than Oct. 15.

Borrowers who qualify will be able to get a portion of the loan forgiven, an interest-rate reduction and an extension of the loan term to 40 years, the FHFA said. 

Last month, FHFA Director Mel Watt said a decision on principal reduction would be coming soon. Citing unnamed sources in March, the Wall Street Journal reported that the agency had already settled on a narrowly focused program.

Pressure from activists

Housing advocates have been ratcheting up the pressure this month for FHFA to act on the issue, and some government officials also have called for action. New York Attorney General Eric Schneiderman pressed for a principal-reduction program in an April 8 letter to Watt, noting that homeowners with delinquent Fannie and Freddie loans numbered 60,000 in New York state in 2013.

 Earlier in April, activists interrupted Watt’s speech at Harvard University’s law school to protest that no principal reduction program had been announced. Watt was forced to end the speech prematurely, according to reports.  

In announcing the program, Watt acknowledged that it may be viewed as “too small and too late” or “too large and unnecessary.” He said that it met the agency’s statutory requirements to provide alternatives to foreclosure without harming the GSEs.

“By meeting both of these statutory obligations, the program satisfies my commitment to implement a principal-reduction plan only if we could structure one that would be a 'win-win' for both borrowers and the enterprises," Watt said.

In a prepared statement, Mortgage Bankers Association (MBA) President David Stevens said the FHFA has had to weigh the goal of helping struggling homeowners in hard-hit neighborhoods against adding risk to the GSEs.

“FHFA’s program design attempts to mitigate some of these concerns and the result is a narrow focus on lower loan balance and severely delinquent mortgages,” Stevens said. “Hopefully this targeted program will help some families who can meet these requirements.”

Stevens also noted that agency and the GSEs have been helping borrowers broadly through existing loan-modification programs.   


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