Owners Offered Mortgage Principal Reductions

April 15, 2016

About 33,000 seriously delinquent borrowers will likely be eligible for a new program under the mortgage giants to have mortgage balances reduced. The new plan – long rumored – was announced by the Federal Housing Finance Agency on Thursday. To qualify, the borrowers must owe more on their home than it is currently worth and meet other criteria.

FHFA, the regulator to Fannie Mae and Freddie Mac, said its principal reduction program “could well be their final opportunity to [help these borrowers] avoid foreclosure,” says Melvin L. Watt, the agency’s director.

To qualify, home owners must have an outstanding balance of more than $250,000 on their mortgage and be more than 90 days delinquent on their mortgage payments as of March 1. After the principal reduction by the FHFA, borrowers still will owe 15 percent more than their homes are worth, The Wall Street Journal reports.

“The national housing market has significantly improved in recent years but there are still areas of the country where home values have not recovered and negative equity remains a real problem,” Watt says. This program will “allow an opportunity for delinquent, underwater borrowers in these areas to avoid foreclosure and save their homes.”

Watt has called the decision to allow principal reductions “the most challenging evaluation the agency has undertaken during my time as director.”

The program has been met with some criticism. Some consumer advocates argue the program doesn’t go far enough in helping enough struggling home owners and others says it comes too late, following about five years after the housing crisis. And some critics say the breaks unfairly treat owners who have remained current on their loans.

By the end of 2015, about 4.3 million borrowers owed more than their homes were worth, according to CoreLogic data. That is down from 12 million in 2009.

Source: “Thousands of ‘Underwater’ Borrowers to Get Relief,” The New York Times (April 14, 2016) and “Fannie’s and Freddie’s Plan to Cut Mortgage Balances May Be Near,” The Wall Street Journal (April 14, 2016)