To prevent foreclosure of, and provide for the reduction of principal on, mortgages held by Fannie Mae and Freddie Mac.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Principal Reduction Act of 2012''.

SEC. 2. PRINCIPAL REDUCTION OF MORTGAGES OWNED OR GUARANTEED BY FANNIE 
              MAE AND FREDDIE MAC.

    (a) Program Authority.--
            (1) In general.--The Federal National Mortgage Association 
        and the Federal Home Loan Mortgage Corporation shall each carry 
        out a program under this section to provide for the reduction 
        of the outstanding principal balances on qualified mortgages on 
        single-family housing owned or guaranteed by such enterprise 
        through reduction of such principal balances, in accordance 
        with this section and policies and procedures that the Director 
        of the Federal Housing Finance Agency shall establish.
            (2) Requirement to reduce principal pursuant to request.--
        Each such program shall require the reduction of principal on a 
        qualified mortgage upon the request of the mortgagor made to 
        the enterprise and a determination by the enterprise that the 
        mortgage is a qualified mortgage.
    (b) Qualified Mortgage.--For purposes of this section, the term 
``qualified mortgage'' means a mortgage, without regard to whether the 
mortgagor is current or in default on payments due under the mortgage, 
that--
            (1) is an existing first mortgage that was made for 
        purchase of, or refinancing another first mortgage on, a one- 
        to four-family dwelling, including a condominium or a share in 
        a cooperative ownership housing association, that is occupied 
        by the mortgagor as the principal residence of the mortgagor;
            (2) is owned or guaranteed by the Federal National Mortgage 
        Association or the Federal Home Loan Mortgage Corporation;
            (3) was originated on or before the date of the enactment 
        of this Act;
            (4) has a principal balance that exceeds the value of the 
        dwelling subject to the mortgage by more than 20 percent; and
            (5) has been determined to be net present value positive 
        for the enterprise that owns or guarantees such mortgage, 
        pursuant to the application of the net present value model 
        identified in subsection (m)(3) that results in the expected 
        net present value of reducing principal on the mortgage 
        exceeding the net present value of foreclosing on such 
        mortgage.
    (c) Principal Reduction on Qualified Mortgages.--To reduce 
principal on a qualified mortgage under a program of an enterprise 
under this section, the enterprise shall--
            (1) reduce the principal for the qualified mortgage to an 
        amount that results in a loan-to-value ratio for the mortgage 
        of not more than 90 percent;
            (2) require that if the dwelling subject to the qualified 
        mortgage that has had its principal reduced under the program 
        is sold by any process other than a foreclosure sale or short 
        sale, to the extent that such property appreciates in value, 
        the mortgagor shall provide not less than one-third of the 
        amount of such appreciation to the enterprise; and
            (3) recover from the mortgagor under the qualified mortgage 
        that has had its principal reduced under the program, if such 
        mortgage subsequently enters foreclosure, an amount equal to 
        the difference between the sales price at foreclosure sale of 
        the dwelling subject to such mortgage and the amount of the 
        outstanding principal balance on mortgage immediately before 
        such principal reduction.
    (d) Streamlined Process.--To the maximum extent possible, each 
enterprise shall--
            (1) limit the amount of paperwork required from a mortgagor 
        to receive a principal reduction under the program established 
        under this section by the enterprise; and
            (2) endeavor to complete the principal reduction for a 
        qualified mortgage pursuant to the mortgagor's request not 
        later than 30 days after receiving such request from the 
        mortgagor.
    (e) Prohibition on Borrower Fees.--Neither the servicer conducting 
the principal reduction on behalf of the enterprise nor the enterprise 
may charge the mortgagor any fee, including any fee for any appraisal 
notwithstanding that such appraisal is required to determine the value 
of the dwelling subject to the qualified mortgage, for the reduction of 
principal of the qualified mortgage under the program under this 
section of the enterprise. All fees and penalties related to any 
default or delinquency on such qualified mortgage shall be waived or 
forgiven.
    (f) Fee to Servicer.--For each qualified mortgage of an enterprise 
for which the servicer of the qualified mortgage provides a principal 
reduction pursuant to the program under this section of the enterprise, 
the enterprise shall pay to the servicer a fee not exceeding $1,000.
    (g) Tax Treatment.--The reduction of principal taken on a qualified 
mortgage under a program under this section shall not result in any tax 
liability for the mortgagor under such mortgage.
    (h) Maintenance of Lien Status.--Any reduction of principal taken 
with respect to a first mortgage under a program under this section 
shall not impair the priority status of liens on the dwelling subject 
to the mortgage, to the extent that there are no additional funds 
advanced to the mortgagor in connection with such principal reduction.
    (i) Maintenance of Loan Status.--Any reduction of principal taken 
with respect to a qualified mortgage under a program under this section 
shall not result in the treatment of the modified loan as a new loan.
    (j) Second Liens.--The Director shall encourage the modification of 
second liens on dwellings that are subject to mortgages for which 
principal reductions are taken under the programs under this section by 
implementing remedial actions on servicers that service mortgages owned 
or guaranteed by the enterprises and own second liens that are not 
modified following a request by the Director upon a reduction of 
principal of the mortgage owned by the enterprise. Upon termination of 
any servicing contracts with such servicers, the Director shall take 
remedial actions with respect to such servicers, which may include--
            (1) cancelling servicing rights of mortgages owned by the 
        enterprises;
            (2) reducing compensation to any such servicer; or
            (3) taking such other actions, consistent with applicable 
        law, as the Director determines is appropriate.
    (k) Restrictions on Compensation.--The Director may not approve 
bonus compensation that exceeds the base compensation for any executive 
or senior executive of an enterprise, unless the aggregate number of 
qualified mortgages for which principal reductions have been taken 
pursuant to the program under this section of such enterprise exceeds 
1,000,000.
    (l) Rule of Construction.--Any reduction of principal of a 
qualified mortgage of an enterprise under a program under this section 
shall be considered consistent with the mission of any conservator of 
the enterprises as such mission is described in section 1367(b)(2)(D) 
of the Federal Housing Enterprises Financial Safety and Soundness Act 
of 1992 (12 U.S.C. 4617(b)(2)(D)).
    (m) Definitions.--For purposes of this section, the following 
definitions shall apply:
            (1) Director.--The term ``Director'' means the Director of 
        the Federal Housing Finance Agency.
            (2) Enterprise.--The term ``enterprise'' means the Federal 
        National Mortgage Association and the Federal Home Loan 
        Mortgage Corporation.
            (3) Net present value.--The term ``net present value'' 
        means the net present value as determined under the model 
        specified in Supplemental Directive 09-01 for the Home 
        Affordable Modification Program of the Department of the 
        Treasury and any updates thereto.
    (n) Regulations.--The Director shall issue any regulations or 
guidance necessary to carry out the programs required under this 
section not later than the expiration of the 6-month period that begins 
on the date of the enactment of this Act.
    (o) Termination.--The requirement under subsection (a)(2) for an 
enterprise to forgive principal on a qualified mortgage shall not apply 
with respect to any request for principal reduction made after the 
expiration of the 12-month period that begins on the earlier of--
            (1) the date that any regulations or guidance issued 
        pursuant to subsection (n) take effect; or
            (2) the expiration of the 6-month period identified in 
        subsection (n).

Summary: Principal Reduction Act of 2012 - Directs the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation each to carry out a program to reduce the outstanding principal balances on qualified mortgages on single-family housing they own or guarantee. Directs a GSE, under its program, to: (1) reduce the principal of a mortgage to an amount resulting in a mortgage loan-to-value ratio of not more than 90. (2) require a mortgagor, if the dwelling for which the mortgage principal has been reduced is sold by any process other than a foreclosure sale or short sale, to pay the GSE at least one-third of any appreciation in value. And (3) recover from the mortgagor, if a mortgage whose principal has been reduced subsequently enters foreclosure, the difference between the foreclosure sales price and the outstanding principal balance on the mortgage immediately before the principal reduction. Prohibits the charging of borrowers fees by either a GSE or a servicer conducting a principal reduction on behalf of a GSE. Requires a GSE to pay any servicer a fee of up to $1,000 for reducing a mortgage principal under the program. Directs the Director of Federal Housing Finance Agency (FHFA) to encourage the modification of second liens on dwellings on which the mortgage principal is reduced under this Act. Prohibits the Director from approving bonus compensation that exceeds the base compensation that exceeds the base compensation for any GSE executive or senior executive unless the aggregate number of qualified mortgages for which principal reductions have been taken pursuant to the program under this Act exceeds 1 million.