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Rep. Waters Introduces Legislation to Compel Principal Reduction, Helping Homeowners and Communities

February 1, 2012
Press Release

Today, Rep. Waters introduced H.R. 3841, the Principal Reduction Act of 2012, which would require Fannie Mae and Freddie Mac to reduce principal on loans that they own or guarantee. She was joined by eight Members of Congress in support of this much needed legislation to stabilize the housing market.

One in four homeowners currently owe more on their home than it is worth. "I'm introducing this legislation not just to help homeowners, but to jumpstart our economy.  With one in four homeowners owing more on their home than what it's worth, there's no question that negative equity is prolonging our economic crisis," Rep. Waters said.

Negative equity is the primary driver of default and foreclosure, and is the primary factor driving the deterioration in household wealth during the recession.  This negative equity is also limiting household mobility, since a household is often unable to sell their home when their debt exceeds the value of the house.  Such limited mobility impedes a household's ability to move for a new job, and exacerbates unemployment.

"There is a way to deal with negative equity—it's called principal reduction and numerous studies have shown that it works," Rep. Waters explained. Studies by the Federal Reserve Bank of NY and Laurie Goodman, mortgage analyst at Amherst Securities group, have confirmed this fact, and noted that principal reduction – or lowering the amount that homeowners' owe on their mortgages – is likely to provide the most successful type of loan modification.

"The great thing about principal reduction is that it can actually save investors and taxpayers money," Rep. Waters continued. "It's more cost effective than allowing a home to go into foreclosure. It's simply a win-win for banks, investors, taxpayers, homeowners, and our communities."

Foreclosed homes are often sold to new buyers for substantially less than the value of the unpaid principal balance on the mortgage. For example, the foreclosed properties Fannie Mae sold in the third quarter of 2011 netted an average 56 percent of the unpaid principal balance on the underlying mortgage. By reducing principal instead of letting the home be sold at a loss through foreclosure, Fannie Mae and Freddie Mac (the enterprises) could generate substantial savings for America's taxpayers. William Dudley, President and CEO of the Federal Reserve Bank of New York, recently noted that "investment firms that purchase delinquent mortgages routinely reduce principal in order to maximize value on these loans. It would make sense for Fannie and Freddie to do this as well in order to minimize loss of value on the delinquent loans they guarantee."

"Despite these clear benefits of principal reduction," Rep. Waters said, "Fannie Mae and Freddie Mac, which own or guarantee $1 trillion in underwater mortgages, have been barred by their conservator from reducing principal, even though principal reduction is net present value positive for the enterprises and would actually save taxpayers money over the long-term."

Federal Housing Finance Agency Acting Director Edward DeMarco, in his capacity as conservator of the enterprises, has publically indicated that he will not direct the enterprises to reduce principal on mortgages they own or guarantee. Furthermore, he has indicated that if principal reduction is a priority for Congress, then Congress should pass legislation to that effect.

"Since FHFA and the Administration need action from Congress," Rep. Waters stated, "I'm more than willing to give them the legislation they need to help America's homeowners and our struggling economy." Rep. Waters' bill would require FHFA to direct Fannie Mae and Freddie Mac to reduce principal on mortgages they own or guarantee.  Specifically the bill would require Fannie Mae and Freddie Mac to reduce principal to a 90 percent loan-to-value ratio. It would protect taxpayers by requiring shared appreciation of one-third of the profits if the home is sold, and would allow the enterprises to recapture any reduced funds if the loan subsequently defaults and enters foreclosure.

"This legislation is long overdue," Rep. Waters said. "I hope that my colleagues on both sides of the aisle will get behind this commonsense, taxpayer saving legislation so that we can all work together to give America's homeowners the help they've been asking Congress for."