WASHINGTON — Federal Housing Finance Agency Director Mel Watt has finally opened the door for Fannie Mae and Freddie Mac to offer a limited principal-forgiveness option to underwater borrowers.
FHFA issued guidance to Fannie and Freddie servicers Thursday that spells out the parameters of the principal-reduction program that might help an estimated 33,000 seriously delinquent borrowers. To be eligible for relief, the borrowers must have been 90 days or more delinquent as of March 1, 2016, and have mark-to-market, loan-to-value ratios that exceed 115%.
Borrowers who became seriously delinquent after March 1 are not eligible for principal relief. The maximum amount of the principal forgiveness is 30% of the unpaid principal balance. If homeowners are more underwater than 30% they may not get down to a 115% LTV level, an FHFA official told reporters Thursday.
Borrowers who meet the new Principal Reduction Modification program's eligibility requirements will receive a solicitation letter from their servicer no later than Oct. 15 that spells out the terms for the modification.
"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 said in a news release.
The FHFA director noted that the principal reduction program may seem "too small and too late" but that it is consistent with FHFA's statutory obligation to help troubled homeowners avoid foreclosure.
President Obama nominated Watt in May 2013 to be the new FHFA director and Republican senators blocked his confirmation for many months on the grounds that he would adopt a principal reduction program. Once Watt was confirmed and took office in early 2013, he disappointed his supporters by continuing to rely on loan modification and refinancing programs to help troubled homeowners.
FHFA also announced changes to its nonperforming loan sales guidelines to help underwater borrowers avoid foreclosure.
