A home under threat of foreclosure in San Antonio, Monday, February 23, 2009. (AP Photo/Eric Gay)
The crucial context to President Obama’s nomination of Representative Mel Watt to head the Federal Housing Finance Agency is principal reduction for distressed homeowners: in other words, a policy to reduce what some people with underwater mortgages owe.
FHFA controls Fannie Mae and Freddie Mac, which in turn holds 60 percent of the mortgages in the United States. The Congressional Budget Office estimated last month that if the FHFA director ordered even a modest write-down of the underwater mortgages held by Fannie and Freddie, 1.2 million borrowers could benefit—and, the government would save $2.8 billion and avoid 43,000 defaults.
FHFA’s current director, Edward DeMarco, has refused to enact this policy—leading to a progressive “Dump DeMarco” campaign. The administration presumably had this in mind when it nominated Watt—who has backed principal reduction strongly in the past—to take DeMarco’s job. (Obama’s Treasury Department agrees that write-downs should happen.)
So, naturally this all came up in Thursday’s Senate Banking Committee confirmation hearing for Watt and four other financial regulatory nominees. Senator Pat Toomey pressed Watt to pre-emptively declare he would not engage in any write-downs.
Watt, to his credit, did not agree—but he also didn’t endorse the policy, and said some potentially troubling things about its supposed necessity.
It’s worth reproducing the exchange nearly in full, as it was the only time principal reduction came up.
TOOMEY: Are you prepared to commit, now, that you will not implement principal reductions on mortgages?
WATT: …I suspect I will be asked to look at that again because some people will still think it’s a relevant question, despite the fact that housing prices have gone up and there are fewer and fewer people underwater at this point than there have been.
But I would start, as I would with any issue that has been decided already by FHFA, I would start by studying carefully how that decision was reached, what it was based on, and then I would build on that new information—the information on which that decision was made is a year and a half old now—and make a responsible decision.
So Watt is pledging to revisit the issue and won’t agree to rule out principal reduction—that’s good. But his suggestion that it may no longer be “relevant” is slightly troubling—there millions of Americans still underwater, including over a million with mortgages at Fannie and Freddie that are either already delinquent or headed that way.