New bill directs GSE, FHA principal reduction programs

A bipartisan bill introduced in the House of Representatives Friday would require regulators to craft principal reduction programs for government-backed mortgages.

Reps. Gary Peters, D-Mich., John Campbell, R-Calif., and Keith Ellison, D-Minn. sponsored the Preserving American Homeownership Act of 2012. More than 11 million borrowers owe more on their mortgage than their house is worth.

The bill directs the Federal Housing Finance Agency and the Department of Housing and Urban Development to develop pilot programs that allow write-downs on Fannie Mae, Freddie Mac and Federal Housing Administration loans.

Mortgage servicers would reduce enough principal to get the borrower down to a 115% loan-to-value ratio, according to the bill. If the homeowner stays current for three years, the servicer can make additional reductions to a 95% LTV, bringing the borrower back to positive equity.

The bill would require borrowers to share up to 50% of any appreciation in value with the GSE or FHA if the home is sold or refinanced.

Net present value tests must show an eligible borrower for such a program would be in such danger of foreclosure or so deeply underwater that other modifications and even forbearance aren't enough.

The FHFA continues to analyze allowing the GSEs to participate in an expanded Home Affordable Modification Program option for principal reduction. The savings, early analysis found, could be easily offset by borrowers who strategically default to take advantage when they otherwise could have remained current on the loans.

Some servicers like Ocwen Financial ($17.30 0.05%) began shared-appreciation programs, but many need months to develop the ability to handle such modifications. Lawmakers said they can no longer wait as the struggling housing market continues limping along.

"The answer to this country's housing crisis is not to sit idly by entrenched in stubborn ideology while the housing market continues to deteriorate," Campbell said. "Instead, we must address this crisis by taking steps that encourage homeowners to take proactive steps, while minimizing costs to the American taxpayer."

Passing the bill is a long shot for a gridlocked Congress. Republicans in control of the House long supported FHFA Acting Director DeMarco and his resistance to principal reduction. Peters and Campbell introduced a bill reforming Fannie and Freddie entirely last year, but the bill has not been taken up.