FHFA Principal Reduction Program Will Barely Dent Underwater Population

So, just how many seriously underwater homeowners will benefit from the Federal Home Finance Agency’s (FHFA) proposed new principal reduction program?

According to a report from RealtyTrac, only about 33,622 homeowners – or about 0.50% of all homeowners who are seriously underwater on their mortgages – would potentially qualify for the new program.

To arrive at this finding, RealtyTrac looked at publicly recorded mortgage and deed-of-trust data along with eligibility criteria provided on the FHFA fact sheet for the new modification program.

To be considered eligible for the program, as proposed, a homeowner must have a loan-to-value ratio of at least 125% and must be actively in foreclosure. In addition, the home must be owner-occupied and the estimated loan amount can be no more than $250,000. The program only applies to underwater mortgages that are held by Fannie Mae or Freddie Mac.

“This new principal reduction program is designed to reach a highly targeted group of borrowers, so it’s not surprising that the share of seriously underwater borrowers who potentially qualify is razor-thin,” says Daren Blomquist, senior vice president at RealtyTrac, in a statement. “To make a more serious dent in the 6.7 million seriously underwater loans, the program would need to be open to homeowners who are not seriously delinquent, given that 98 percent of all seriously underwater loans are not actively in the foreclosure process – or open to investors – given that non-owner-occupied properties account for 59 percent of all seriously underwater homes. But, there may not be a strong fiscal or political case to help out those two categories of underwater homeowners, particularly in an election year.”

As of the end of the first quarter, states with the highest shares of seriously underwater homes potentially eligible for the FHFA’s principal reduction modification program included New Jersey (2.56%); Illinois (1.07%); Florida (0.67%); Pennsylvania (0.64%); Ohio (0.60%); New York (0.60%); Massachusetts (0.58%); Nevada (0.54%); and Wisconsin (0.54%).

Taking the steam out of just about any proposal to write-down underwater mortgages is the fact that rising home prices are bringing more and more homeowners into positive equity. RealtyTrac’s Home Equity and Underwater Report shows that about 12.0% of all properties with a mortgage – or about 6.7 million U.S. properties – were seriously underwater at the end of the first quarter. That’s down 13.2% from 7.3 million in the first quarter of 2015.

Meanwhile, the number of “equity rich” homeowners increased nearly 1.3 million during the same period.

States with the highest shares of underwater properties included Nevada (22.6%), Illinois (22.3%), Ohio (20.8%), Florida (18.8%) and Michigan (17.7%).

Metropolitan areas with the highest shares of underwater properties included Cleveland (27.1%); Akron, Ohio (26.2%); Las Vegas (26.2%); Lakeland, Fla. (23.8%); and Dayton, Ohio (23.7%).

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