U.S. extends limited reduction of mortgage principal for stressed homeowners

Reporting from Washington —  A top federal regulator on Thursday announced a long-awaited initiative to allow some homeowners facing foreclosure to reduce the principal on their mortgages.

But the plan is limited and comes years after advocates began pushing for much broader relief in the wake of the housing market crash.

The program from the Federal Housing Finance Agency will help about 33,000 people whose mortgages are backed by Fannie Mae and Freddie Mac, the housing finance companies seized by the government in 2008.

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“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,” said FHFA Director Mel Watt, who has been under pressure to enact a broad principal-reduction program since taking office in late 2013.

At the same time, Republicans in Congress have warned that taxpayers would end up footing the bill if Fannie and Freddie sustained losses because such a program encouraged underwater homeowners to stop making payments so they would qualify for a principal reduction.

Watt said the small-scale plan balances the agency’s statutory mandate to “maximize assistance for homeowners” while not adversely affecting the finances of Fannie and Freddie.

“This plan will no doubt be viewed by some as too small and too late and viewed by others as too large and unnecessary,” Watt said.

The program is available to homeowners who were at least 90 days delinquent on mortgage payments as of March 1. The outstanding principal on the mortgage must be no more than $250,000, and the value of the home must be at least 15% less than what is owed on the loan.

The mortgage principal could be reduced no lower than 15% above market value, meaning the homeowner still would be underwater. No more than 30% of the total principal could be forgiven.

Eligible borrowers should expect to hear from their mortgage servicer by Dec. 31.

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FOR THE RECORD

12:02 p.m.: A previous version of this story said mortgage principal could be reduced no lower than 15% below market value and the program was open until Oct. 15. Actually, mortgage principal could be reduced no lower than 15% above market value and eligible borrowers should expect to hear from their mortgage servicer by Dec. 31.

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The FHFA also announced another initiative Thursday regarding sales by Fannie and Freddie of delinquent loans that are intended to help reduce foreclosures. But the companies have sold only about 29,000 such loans and the program will affect a relatively small number of borrowers, the agency said.

Fannie and Freddie have allowed principal reductions in some isolated instances. But the agency has resisted calls from President Obama, congressional Democrats and state officials, such as California Atty. Gen. Kamala Harris, to enact a broader program.

From 2009 tp 2014, the FHFA was headed by Edward J. DeMarco, a career bureaucrat who had been acting director since a Republican appointee stepped down.

DeMarco opposed an expanded principal-reduction program, and Senate Republicans blocked Obama from replacing him.

Watt, a former Democratic congressman from North Carolina, was confirmed to replace DeMarco after Senate Democrats changed the rules to make filibustering presidential nominees more difficult.

Watt spent more than two years studying a principal-reduction program. During that time, the housing market has strengthened, and foreclosure rates have fallen.

jim.puzzanghera@latimes.com

Follow @JimPuzzanghera on Twitter

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