Jennifer Taub is a professor at Vermont Law School. Her book “Other People’s Houses” was published in May by Yale University Press.
Well, that was fast.
At a Senate Banking Committee hearing on Nov. 19, Melvin Watt, the director of the Federal Housing Finance Agency, was in the hot seat, explaining to Senator Elizabeth Warren why Fannie Mae and Freddie Mac had done so little to help families who were facing foreclosure save their homes.
Grilling Mr. Watt about the plight of underwater homeowners — the millions of borrowers who, after the housing bubble burst, still owe more on their mortgages than their homes are worth — Senator Warren, a Massachusetts Democrat, said, “You’ve been in office nearly a year and you have not helped a single family, not even one, by agreeing to a principal reduction.”
Since its creation in 2008, the Federal Housing Finance Agency (which acts as regulator and conservator for Fannie and Freddie) has opposed reducing principal on underwater mortgages that the two enterprises own or guarantee. This opposition prevents borrowers from lowering their total outstanding debt and, correspondingly, their monthly payments.
Even when the value of reducing mortgage principal is greater than what a foreclosure sale would yield, Fannie and Freddie refuse.
Over the years, research has indicated that Fannie and Freddie would save money by reducing amounts owed on underwater mortgages. As one example, a Congressional Budget Office study in 2013 concluded that principal reduction could help 1.2 million borrowers and save the two enterprises $2.8 billion. The agency has not been persuaded by the data.
“Every day that you delay,” Senator Warren said, “more families lose their homes.” She then asked, “When are you going to have an answer?” In response, Mr. Watt assured her that this was a priority and that the agency was “getting closer.” It seemed like the standard bureaucratic answer.
But less than a week after that Senate hearing, Mr. Watt made good. On Nov. 25, his agency announced a directive aimed at helping families in distress.
The agency told Fannie and Freddie to permit owners who had lost their homes to buy them back at fair market value. Prior to this directive, former owners had to pay off the full principal balance to get their old homes back. For homeowners who were previously underwater, this amount could be substantially higher than what the home was worth.
Clearly, this policy change took a little heat off Mr. Watt. But who else will benefit?
Housing advocates like Eloise Lawrence, a staff lawyer with the Harvard Legal Aid Bureau, have an answer. Although expressing disappointment about the limited nature of the directive, Ms. Lawrence described it as “a positive move in the right direction.” She also noted that the bureau has four families who would directly benefit.
Those clients include Ramon and Rosanna Suero. As described in a DealBook column in June, the Sueros purchased a condominium in Dorchester, Mass., in 2005 for $283,000, using a combination of two high-risk mortgages. They lost the condo in a foreclosure sale in 2010. The nonprofit group Boston Community Capital has offered to purchase the condo from Freddie Mac for the fair market value of $115,000. The group hopes to sell it back to the Sueros, financed with a more affordable fixed-rate mortgage.
Freddie refused Boston Community Capital’s offer, saying that only the full balance on the loan was acceptable because the home would be returned to its owners. Under Freddie’s policy, anyone other than the Sueros could buy at the lower market value.
So in 2013, the Sueros, who are jointly represent by Andrea Park of the Harvard Legal Aid Bureau and Nicole Summers of the Northeast Justice Center, sued Freddie Mac. The court has ordered that pending the outcome of the case, the family cannot be evicted and the condo cannot be sold. Their condo is one of the properties in Freddie’s inventory that is subject to the new directive.
We wonder, then, will the Sueros have their home back for the holidays? It’s too soon to tell. Stefanie Johnson, a spokeswoman for the Federal Housing Finance Agency, responded via email that the agency “does not comment on pending litigation.” She added that “individuals can apply” under the new policy and that “this will be addressed” by Freddie Mac and Boston Community Capital.
Meanwhile, though, there are considerable gaps in the new directive. It does nothing to prevent families from losing their homes through short sales or foreclosures. It only helps those who already lost ownership. Moreover, the only homes eligible for repurchase are those among the 121,000 properties owned by Fannie and Freddie.
Helping prevent future defaults and foreclosures remains important, especially in light of another new policy. In October, Mr. Watt announced plans to permit Fannie and Freddie to buy or guarantee mortgages where borrowers put down as little as 3 percent of the purchase price. He said these mortgages would be subject to “sensible and responsible guidelines” that would take into account “compensating factors.” Just this week, the guidelines were released.
Opponents worry that lower down payments will lead to new defaults, foreclosures and bank failures. Supporters contend that the benefit of expanding access to credit and thus promoting homeownership greatly outweighs any modest increase in risk. They note that it was the layering of risks, not low down payments on their own, that caused the last crisis.
History shows, however, that as memories fade and profits are within reach, risks will get layered, and borrowers will end up in distress.
It is all the more important, then, that the agency direct Fannie and Freddie to put actual foreclosure prevention policies in place that would help underwater borrowers still in their homes. If we genuinely value homeownership, then we need to help families keep their homes once they have acquired them.