Fannie, Freddie to Allow Debt Cuts for Foreclosed Borrowers

Fannie Mae and Freddie Mac will let borrowers who have gone through foreclosure buy back their homes at market prices under a policy shift announced by the regulator for the two U.S.-owned companies.

The change outlined by the Federal Housing Finance Agency in a statement today essentially gives some people who owe more than their homes are worth a way to cut mortgage debt. The step follows criticism from consumer groups and Democratic lawmakers who have called for broader principal reduction for homeowners.

“This is a targeted, but important policy change that should help reduce property vacancies and stabilize home values and neighborhoods,” FHFA Director Melvin L. Watt said in the agency’s statement.

FHFA previously required borrowers who went through foreclosure to pay the outstanding mortgage balance before they could retake possession of homes owned by Fannie Mae and Freddie Mac, even though anyone else could pay the current market price.

The ban extended to nonprofit groups that bought homes and attempted to transfer them to prior owners. Massachusetts Attorney General Martha Coakley sued unsuccessfully in federal court to challenge the practice, saying it violated a state law allowing nonprofits to sell properties at fair-market value.

The case, which was dismissed last month, cited the work of Boston Community Capital, a group whose chief executive officer, Elyse Cherry, raised funds for Coakley’s unsuccessful bid for governor this year.

‘Encouraging Step’

“Today’s move by the FHFA is an encouraging step in the right direction,” Cherry said in an e-mail statement. “In our experience at Boston Community Capital, permitting sales at fair-market value is a just and sound strategy for helping the many underwater homeowners still seeking relief.”

The new policy will apply only to the 121,000 foreclosed homes currently on the books of Fannie Mae and Freddie Mac, which have operated under FHFA conservatorship since 2008.

Watt last week signaled that his agency may soon allow debt cuts in some additional limited cases. Principal reductions are not “off the table,” he said Nov. 19 at a congressional hearing where Senator Elizabeth Warren, a Massachusetts Democrat, criticized him for failing to act more quickly on the issue.

FHFA is analyzing ways to reduce mortgage balances for borrowers without causing losses to Fannie Mae and Freddie Mac, and will come to a decision soon, Watt said.

“It’s the most difficult issue I have faced as director of the agency,” he said.

Coakley, in an e-mailed statement, said today’s decision was encouraging.

“While this is a step in the right direction, we encourage FHFA to further help families regain financial footing by permitting principal reduction and allowing all properties in the foreclosure process to benefit from this change to its buyback policies,” she wrote.

(An earlier version of this story was corrected to change misspelling of Elyse Cherry’s name.)

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