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Principal Reduction Ahead for Agencies?

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A member of the House of Representatives has been nominated to take over the regulator that oversees the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. If the nominee makes it through the confirmation process, negative-equity borrowers on agency home loans could see principal reduction.

North Carolina Rep. Melvin L. Watt has been nominated by President Obama to be the director of the Federal Housing Finance Agency. The president announced the nomination at a press briefing Wednesday afternoon.

The 67-year-old Democrat was elected to the U.S. House of Representatives in 1992 and is “one of only two African American members elected to Congress from North Carolina in the 20th century,” according to his congressional website. He currently is a member of the House Judiciary Committee.

Watt practiced law from 1970 until 1992 specializing in minority business and economic development law at a law firm known for its civil rights reputation, the website says. He was a Phi Beta Kappa graduate of the University of North Carolina at Chapel Hill in 1967 and received a JD degree from Yale University Law School in 1970.

In March 2007, Watt joined three other representatives to introduce bipartisan legislation to overhaul the regulatory oversight of the government-sponsored enterprises. At the time, Fannie and Freddie were regulated by the Office of Federal Housing Enterprise Oversight — an under-staffed, under-funded agency that was no match for the politically powerful pair of housing finance companies. Among the four congressmen to sponsor the legislation was Louisiana’s Richard Baker, who fought hard to rein in Fannie and Freddie.

A more powerful regulatory structure was ultimately created when Congress passed, and President Bush signed, The Housing and Economic Recovery Act of 2008 in July 2008. Among other things, the law authorized the Department of the Treasury to purchase GSE obligations and created FHFA. Two months later, Fannie and Freddie were seized by FHFA, and the Treasury began purchasing senior preferred stock.

photo of Rep. Mel Watt
Congressional photo of Rep. Mel Watt

If Watt is confirmed by the Senate, he will replace Acting FHFA Director Edward J. DeMarco, who has frustrated the Obama administration and Congressional Democrats with his resistance to principal reduction on Fannie and Freddie loans.

Sen. Elizabeth Warren (D-Mass.), who was appointed by Obama to establish the Consumer Financial Protection Bureau, praised Watt for being an “excellent choice” but called for the removal of DeMarco in the meantime.

“Under DeMarco’s leadership, the FHFA has refused repeatedly — often with cold indifference — to work with families struggling to save their homes,” Warren said in a statement. “Families deserve an FHFA that pursues helpful policies like principal write-downs and abandons senseless rules like those that prevent foreclosed homes from being re-sold to their original owners.”

Another official from the Bay State, Massachusetts Attorney General Martha Coakley, echoed Warren’s sentiment.

“For too long, Fannie Mae and Freddie Mac have been a roadblock to progress for millions of middle class families,” Coakley said in a statement.

The president is likely to find a more friendly ally in Watt, who was among 19 House members that signed a letter sent to Obama this past December calling for principal reduction on loans owned or guaranteed by Fannie and Freddie. The letter highlighted a 22 percent negative equity share, or about 10.8 million loans.

“Given the clear benefits of providing assistance to underwater borrowers, as well as the significant savings for the American taxpayers, we believe that provisions expanding such assistance should be part of any deal to resolve the fiscal cliff,” the letter stated. “At a minimum, such legislation should require that Fannie Mae and Freddie Mac offer principal reduction loan modifications to borrowers who are net present value positive.”

However, the principal reduction debate could become moot for borrowers in some markets like California that are experiencing a recovery.

In today’s remarks, Obama highlighted how many borrowers who have paid their mortgages on time have been unable to refinance, while some working families did everything right but are still upside-down.

“One of the best things I can do is to nominate Mel Watt to lead the Federal Housing Finance Agency,” Obama said at the ceremony.

The president added that as a member of the House committee that has overseen housing policy for two decades, Watt has led efforts to rein in unscrupulous mortgage lenders and helped protect consumers from the reckless risk-taking that led to the financial crisis.

“Mel understands as well as anybody what caused the housing crisis,” Obama said. “He knows what it’s going to take to help responsible homeowners fully recover.”

Rep. Watt’s chief of staff, Joyce Brayboy, was among influential borrowers former Countrywide Financial lobbyist Jimmie Williams referred to the lender’s VIP program, according to a March 2009 staff report for the House Committee on Oversight and Government Reform, Friends of Angelo: Countrywide’s Systematic and Successful Effort to Buy Influence and Block Reform.

Republican Senator Bob Corker issued a statement expressing great disappointment at the president’s choice.

“This gives new meaning to the adage that the fox is guarding the hen house,” Corker said. “The debate around his nomination will illuminate for all Americans why Fannie and Freddie failed so miserably.”

Corker is calling for explicit plans to wind down Fannie and Freddie before a new FHFA director is considered.

Mortgage Bankers Association President and Chief Executive Officer David H. Stevens issued a statement indicating that Watt “has a big job ahead of him” if he is confirmed. He said that the No. 1 priority of an FHFA director needs to be transitioning Fannie and Freddie from conservatorship and creating a strong secondary mortgage market that relies on private capital.

“In the meantime, in order to sustain the burgeoning housing recovery, the FHFA director ought to ensure that the agency, as well as Freddie and Fannie, operate in a completely transparent manner,” Stevens added. “These entities currently dominate the mortgage market, and changes they make to programs and policies have profound implications for borrowers and lenders alike.

“That is why MBA has been, and will remain, a loud voice for an open and transparent process that requires FHFA, Freddie and Fannie to publish their proposals and directs them to fully consider input from all stakeholders on important policy matters.”

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