Even though his predecessor as head of the Federal Housing Finance Agency (FHFA) was adamant in his refusal to consider it, Melvin L. Watt seems receptive to allowing Freddie Mac and Fannie Mae some leeway to reduce the principal balance of their troubled loans.

According to Bloomberg News, Watt told reporters that he is studying a way to provide principal reduction to a narrow group of homeowners who are underwater on their mortgages without increasing costs for U.S. taxpayers.  Principal reduction has been a principle tool used by other lenders when modifying mortgages but is not allowed on those in the portfolio of the two government sponsored enterprises (GSEs).

The number of homeowners who owe more on their homes than those homes are worth has been declining steadily as home prices have risen and only a subset of the estimated 5.1 million such homes remaining belong to or are guaranteed by Fannie Mae and Freddie Mac.  

If principal reduction is allowed, Watt said, "I think it will be substantially narrower than the vision people have. Reducing everybody's principal would cost taxpayers billions."

Edward J. DeMarco, former acting director of FHFA had locked horns with housing advocates and with several key members of the House Financial Services Committee over the issue. He refused to allow Fannie Mae and Freddie Mac to participate in a Treasury Department program offering incentives to lenders for including principal reductions in modification plans through the Home Affordable Modification Program (HAMP.)  This refusal came even as FHFA released its own study showing that participation could save the GSEs up to $3.6 billion and taxpayers up to $1 billion while assisting a half million borrowers. 

The Treasury Department reported in December that 211,000 modifications through HAMP had included principal reduction - 30 percent of the total.

Bloomberg said that FHFA took a first step toward debt cuts late in 2014, allowing borrowers who had lost homes to foreclosure to repurchase them at market rates.

Watt also told reporters he had no plans to accede to requests from shareholders to make changes in the Preferred Senior Stock Purchase Agreements the GSEs made with the Treasury Department at the time they were placed in conservatorship.  Shareholders would like GSEs to be able to retain some of their profits, something specifically prohibited by the agreement. 

"I don't know that I perceive it's my responsibility to start that conversation," Watt said. "I inherited a set of agreements. I know why they were put in place, basically as a quid pro quo for rescuing Fannie and Freddie."