Officials from eleven states have formally petitioned the Federal Housing Finance Agency (FHFA) to reverse its opposition to mortgage loan principal reduction on the part of Freddie Mac and Fannie Mae.  The Attorneys General of California, Delaware, Illinois, Iowa, Maryland, Massachusetts, Minnesota, New Mexico, New York, Oregon, and Vermont sent a letter to the agency's Acting Director Edward J. DeMarco with this request on Thursday.

DeMarco has been under pressure from Congress and from the U.S. Treasury to allow mortgages owned or guaranteed by the two government sponsored enterprises (GSEs) to participate in the Home Affordable Modification Programs Principal Reduction Alternative (HAMP PRA) which forgives a portion of the mortgage balances of homes that are both delinquent and "underwater."  FHFA prefers instead that principal forbearance is used in order to preserve the GSEs assets.   Freddie Mac and Fannie Mae are under the conservatorship of FHFA.

The Attorneys General argue that the failure to implement principle loan forgiveness programs harms struggling homeowners and investors.  The letter, released by Massachusetts Attorney General Martha Coakley, said in part, "The financial stability of Fannie Mae and Freddie Mac will not be harmed if they engage in principal forgiveness and according to new data could save close to $1.7 billion.  We will soon see the results of the country's largest banks implementing principal loan reduction as required under the recent Multistate Servicing Settlement. It is now time for the FHFA to accept the fact that principal forgiveness programs help borrowers, help communities and can improve the creditors' bottom line."

The letter argues there is no data to support the view that forgiveness conflicts with the goal of asset preservation but rather it restores a borrower's status as a stakeholder and provides them a stronger incentive to maintain payments.

In the letter, the Attorneys General argue that the increase of incentive payments (by the U.S. Treasury) to investors for allowing forgiveness under the Home Affordable Modification Program (HAMP) should also reduce concerns regarding the potential impact on the financial stability of Fannie Mae and Freddie Mac as either owner or guarantor of these loans.  Nor is the reluctance to engage in principal forgiveness based on the inability of internal computer systems to handle new programs an excuse as major banks have overcome similar concerns after the Multistate Servicing Settlement reached last month.

The letter states further that because the GSEs together own a majority of the nation's home loans, "they must be a leader in the arena of loan modification best practices and not an obstruction."

Coakley's office said that she had sent a similar letter on her own to DeMarco in February.  The new letter, now backed by 10 additional Attorneys General, "reflects a growing consensus around this issue."