This Man Wants to Lower Your Mortgage Payment

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© Yuri Gripas / Reuters

Representative Mel Watt testifies before the Senate Banking, Housing and Urban Affairs Committee confirmation hearing to be the regulator of mortgage finance firms Fannie Mae and Freddie Mac on Capitol Hill in Washington June 27, 2013.

The Federal Housing Finance Authority — overseer of housing giants Fannie Mae and Freddie Mac — finally got a new Director when North Carolina Congressman Mel Watt was confirmed to the post by the Senate yesterday. The move was one of the less publicized results of the Senate ending the filibuster for many Presidential appointments late last month, but it actually could end up being one the most consequential.

The main reason why President Obama had been unable to confirm his own pick to head the agency is Congressional Republicans’ distaste for a “principal reduction” program aimed at helping underwater homeowners with mortgages owned or guaranteed by Fannie Mae and Freddie Mac. A program of principal reduction would, likely with the help of federal TARP dollars, write down the value of mortgages for homeowners that owe more on their home than it’s worth. Theoretically, such a program could be a win-win because it would make underwater homeowners more likely to pay the remainder of their mortgages rather than walking away from the property and handing over the keys.

Principal reduction could help taxpayers in two ways. First–since taxpayers are effectively the owners and guarantors of Fannie and Freddie mortgages– they benefit from the fact that on average such a program would increase the likelihood that homeowners stay in their homes and pay the rest of what they owe. Foreclosure is a very costly process for mortgage lenders, and so targeted principal reduction could make the portfolio of mortgages owned or guaranteed by Fannie and Freddie more valuable. Secondly, by lessening the burden underwater homeowners face, we’d be stimulating the economy more broadly.

For years, acting director Ed Demarco resisted principal reduction, arguing that such a program would violate his statutory duty to protect taxpayers. The only problem is that study after study has argued that done correctly, it would save taxpayers money. Now that Watt’s in the position, the runway would seem clear to launch such a program. Though the housing market has made serious improvements over the past year and a half, a recent report from real esate analytics firm Core Logic shows that 7.1 million homes, or 14.5% of all residential homes, remain underwater.

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