Regulators won't reduce the principal on mortgages

The Associated Press

WASHINGTON - A federal regulator is standing by its decision to bar Fannie Mae and Freddie Mac from reducing principal for borrowers at risk of foreclosure, resisting pressure from the Obama administration.

The Federal Housing Finance Agency announced the decision Tuesday after months of considering the option.

The agency's acting director, Edward DeMarco, has long opposed allowing Fannie and Freddie to offer principal reduction.

DeMarco said an extensive analysis by the FHFA found the potential benefit was too small compared with the costs and risks. The risks include as many as 19,000 borrowers strategically defaulting on their loans, according to the analysis.

About 74,000 to 248,000 homeowners would be eligible for principal reductions from Fannie and Freddie, the analysis showed. An estimated 11 million Americans owe more on their mortgages than their homes are worth.

The Obama administration immediately voiced its disappointment with the decision.

"I do not believe it is the best decision for the country," Treasury Secretary Timothy Geithner said in a letter to DeMarco.

Geithner said allowing Fannie and Freddie to do "targeted" reductions of principal for troubled borrowers would provide much-needed help to a significant number of troubled homeowners. He said that would help repair the nation's housing market and result in a net benefit to taxpayers.

The government rescued Fannie and Freddie in September 2008 to cover losses on soured mortgage loans. Since then the FHFA, which is independent of the administration, has controlled their financial decisions.

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