Recovering Housing Market Solves Principal Reduction Dilemma

By / 5.31.2013

Senate Republicans are drawing a bead on Rep. Mel Watt (D-NC), President Obama’s pick to take over as Director of the Federal Housing Finance Agency(FHFA). A key reason is that Watt supports principal reduction, which is anathema to the GOP. It would be a shame, however, if Watt’s confirmation were scuttled over a dispute that has been overtaken by events. U.S. housing markets have come roaring back to life, and while that’s great news, it has probably closed the window for principal reduction.

During the depths of the housing crisis, many progressives called for reducing the mortgages of homeowners who are “underwater,” meaning they owe more than their house is worth. Conservatives bitterly opposed principal reduction, saying it would reward irresponsible borrowers and expropriate the property of legitimate lenders.

FHFA Director Ed DeMarco, the man Watt has been nominated to replace, resolutely resisted pressure from the Obama administration and Congressional Democrats to use principal reduction remedies on mortgages backed by the two Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac

Recently, the White House announced a two-year extension of their central housing modification program, Home Affordable Modification Program (HAMP). The program differs from the Administrations similarly titled refinancing initiative, Home Affordable Refinancing Program (HARP) in that it allows underwater homeowners structural changes to their loans whereas HARP just lowers the interest rate.

According to a memo circulated by Compass Point Research and Trading,” The extension of the HAMP gives the Obama Administration the necessary optionality to push for principal reduction on GSE-backed mortgages through the HAMP if there is a change in leadership at the Federal Housing Finance Agency (FHFA).”

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