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Fannie, Freddie regulator hesitates to order principal reduction

Regulator Melvin L. Watt hasn't ordered Fannie Mae, Freddie Mac to start major principal reduction initiative

WASHINGTON — About a year ago, Democrats and housing advocates anticipated that the newly installed regulator for mortgage financing giants Fannie Mae and Freddie Mac would move quickly to reduce principals on underwater home loans for struggling homeowners.

It hasn't worked out that way yet.

Melvin L. Watt, a longtime Democratic congressman, succeeded an acting director of the Federal Housing Finance Agency who had been vilified by liberals for not taking that step to slow the tide of foreclosures.

But to the surprise of many, Watt hasn't ordered Fannie and Freddie to start a major principal reduction initiative. He's still studying the issue, he said.

And even if he does eventually start such a program, it would be "substantially narrower" than people have called for because of his concerns it could hurt the finances of the bailed-out firms, Watt said.

"If Congress passed it, they could just give everybody principal reductions. I don't think I … have that luxury. In fact, I know I don't," Watt said this week in his first sit-down with reporters since being sworn into the job in January 2014.

His hesitancy has frustrated some fellow Democrats and liberal advocacy groups.

Sen. Elizabeth Warren (D-Mass.) pressed Watt at a hearing last fall, saying she wanted "to know why this has not been a priority for you."

ColorOfChange.org, a civil rights group, told its members that "Mel Watt is uniquely positioned to take bold action to address the nation's underwater mortgage epidemic" and urged them to demand that he order Fannie and Freddie to allow principal reductions as well as take other steps to halt foreclosures.

"I think people were hopeful when he came in that he would be able to change policy," said Kevin Stein, associate director of the California Reinvestment Coalition, an economic justice advocacy group.

"If there's not a broad-scale principal-reduction program, it will be disappointing and it will be frustrating for the families who could really get help and for the neighborhoods that they live in."

Easing the pressure a bit is the fact that the number of borrowers who are underwater on their mortgages, in which the principal exceeds a home's value, has been cut in half in recent years.

Watt, though, isn't winning any friends among Republicans either. Most of them oppose principal reductions for fear that taxpayers would end up footing the bill for any losses.

The GOP has criticized Watt for other initiatives that housing advocates praise, primarily new programs allowing Fannie and Freddie to back mortgages with down payments as low as 3%.

Watt, a former House member from North Carolina for 21 years before his appointment in late 2013, said he's not paying attention to the politics now that he's moved from Capitol Hill to a regulator's seat.

"I just don't have any politics anymore," he said. "Our decisions are all research- and data-driven. I'm playing a different role now."

Watt, 69, succeeded Edward J. DeMarco, a career bureaucrat who had been acting director since a Republican-appointee stepped down in 2009.

Republicans had blocked President Obama from replacing DeMarco, whom they praised for not allowing principal reductions at Fannie and Freddie. Regulators had seized the two firms in 2008 as they teetered near bankruptcy from bad mortgages they bought or guaranteed.

Watt was confirmed only after Senate Democrats changed the rules to make filibustering presidential nominees more difficult.

One reason there were high hopes for Watt was that he was among House members who wrote to Obama in 2012 asking for a requirement in the budget bill that Fannie and Freddie offer principal modifications.

But Watt has taken only small steps on the issue.

He allowed an Azusa couple, for instance, to repurchase a home they lost to foreclosure in 2010. The purchase price was less than the value of the mortgage they previously had, in effect reducing the principal on the house.

Watt said the law requires him to ensure that Fannie and Freddie make a profit. With the turnaround in the housing market, the firms have returned to profitability and have more than offset the $187.5 billion in bailout money with dividend payments to the government.

"What we've tried to do is figure out whether there may be loans where you could do principal reduction and it would be beneficial to a borrower and not a negative cost to Fannie and Freddie," Watt said.

"If there is such a win-win scenario," he said, "it would not be nearly as broad as a lot of the people who have talked about this seem to be suggesting it might be."

Watt noted that the number of underwater mortgages has declined substantially. There were 5.1 million underwater mortgages as of Sept. 30, according to data research firm CoreLogic Inc. in Irvine. That figure was down from 10.6 million two years earlier.

He also cited what he called "moral hazard" concerns that a large program could encourage some homeowners who are current on their mortgages to fall behind to get principal reductions.

Housing advocates dismiss the notion that a homeowner would risk foreclosure to get a principal reduction, noting that millions of Americans still could be helped if Watt launched a program.

"Principal reduction would not just be good for the homeowners who are suffering … it's necessary for their neighborhoods and the cities they live in and it would be good for the aggregate economy," said Peter Dreier, chairman of the Urban and Environmental Policy program at Occidental College.

"His cautiousness and his unwillingness to advance principal reduction, I think, has really disappointed a lot of housing advocates and people like myself," he said.

jim.puzzanghera@latimes.com

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