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76 improved in recent years but there are still areas of the country where home values have not recovered and negative equity remains a real problem. e Principal Reduction Modification program we are announcing today, along with the changes we are making to our NPL (non- performing loan) sales guidelines, will allow an opportunity for delinquent, underwater borrowers in these areas to avoid foreclosure and save their homes." Eligible borrowers must have loans that are owned or guaranteed by Fannie Mae or Freddie Mac and meet specific eligibility criteria, the announcement noted. However, there is one concern that the program does not address directly: What will happen if borrowers begin to default purposely on their mortgage in order to qualify for the program? To address the issue of borrowers defaulting on purpose, the FHFA outlined several eligibility criteria to qualify for the program. e modification will be available to owner-occupant borrowers who are 90 days or more delinquent as of March 1, 2016, whose mortgages have an outstanding unpaid principal balance of $250,000 or less, and whose mark-to-market loan-to-value ratios exceed 115 percent (15 percent underwater). Approximately 33,000 borrowers will be eligible for a Principal Reduction Modification, the FHFA estimates. In addition, servicers must find and present borrowers eligible for a Principal Reduction Modification by October 15, 2016. e recent changes announced today by the FHFA will likely reel in some scrutiny from the both the industry and consumers, according to Watt. "is plan will no doubt be viewed by some as too small and too late and viewed by others as too large and unnecessary. However, the plan is consistent with FHFA's statutory obligation to 'maximize assistance for homeowners' by providing some borrowers what could well be their final opportunity to avoid foreclosure," Watt stated. "It is also consistent with our statutory obligation to provide this assistance in ways that we reasonably expect will not have adverse economic consequences for the Enterprises. By meeting both of these statutory obligations, the program satisfies my commitment to implement a principal reduction plan only if we could structure one that would be a 'win-win' for both borrowers and the Enterprises." Predictably, the announcement that the FHFA would offer principal reduction drew mixed reactions from lawmakers. Sen. Jack Reed (D-Rhode Island), a senior member of the Senate Banking Committee, praised the program. "I am pleased that FHFA, under Director Watt's leadership, has finally chosen to give families still struggling from the wake of the financial crisis one more chance to save their homes," Reed said. "I commend FHFA for carefully analyzing this issue, which included efforts to ensure this program is also consistent with the statutory mandate to preserve and conserve the assets of the enterprises. is decision is long overdue and offers meaningful foreclosure relief to hundreds of families in Rhode Island and tens of thousands more nationwide." Rep. Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee, had a different take on the issue, calling the principal reduction program a "Washington scheme" and a continuation of the "boom-bust-bailout cycle." Hensarling quoted Yogi Berra in saying that it was "déjà vu all over again." "Contrary to the fable told by the Left, the root cause of the financial crisis was not deregulation but dumb regulation," Hensarling said. "Regulations and statutes that ultimately put people in homes they could not afford to keep and led to the bailout of Fannie Mae and Freddie Mac, the biggest taxpayer-funded bailout in history. We need to build a sustainable housing finance system that protects both homeowners and taxpayers. But instead, the FHFA is helping Washington roll the dice again with another scheme founded on perverse incentives. Principal reductions exacerbate the same moral hazard problems that left taxpayers holding the bag for the government's failures. Further, the FHFA itself previously warned us that principal reduction would be very costly for taxpayers, who already have spent hundreds of billions to bail out Fannie and Freddie." "This plan will no doubt be viewed by some as too small and too late and viewed by others as too large and unnecessary." —FHFA Director Melvin watt

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