"We continue to encourage you to exercise due diligence to establish conservative haircuts and controls over collateral pledged" by insurers to support advances, said FHFA Director Mel Watt.
"We continue to encourage you to exercise due diligence to establish conservative haircuts and controls over collateral pledged" by insurers to support advances, said FHFA Director Mel Watt. Bloomberg News

WASHINGTON – The Federal Housing Finance Agency will announce within the next 30 days whether it will endorse a principal reduction strategy for the government-sponsored enterprises, or take "principal reduction off the table entirely," agency Director Mel Watt said in remarks Tuesday.

Watt's comments, before the Women in Housing and Finance group here, signal the agency may finally be reaching resolution on whether Fannie Mae and Freddie Mac will allow principal reductions. The question has not only dogged Watt's relatively short tenure but has been a point of contention about how to improve loss mitigation since after the 2008 financial crisis.

"It would not be an overstatement to say that this has been the most challenging evaluation the agency has undertaken during my time as director," Watt said in the prepared remarks. "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."

His remarks created more uncertainty about the FHFA's deliberations one day after the Wall Street Journal, quoting unnamed sources, reported that the GSE regulator has already approved a limited principal reduction plan to help fewer than 50,000 homeowners.

The program would likely help borrowers already behind on their mortgages who are underwater, the article said. Fannie and Freddie would allow principal forgiveness only when it would result in fewer losses than other strategies, the report said.

But Watt's speech suggests the agency's final strategy is still unclear.

"Many have asked why it has taken so long to reach a conclusion," he said in the speech. "The direct answer is that making this determination involves consideration of an extremely complicated set of factors. These factors include, among others, balancing the decreasing number of borrowers who are both underwater and seriously delinquent with the cost and significant operational complexity for the enterprises and servicers to implement a principal reduction program."

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