Massachusetts Attorney General Martha Coakley told Freddie Mac and Fannie Mae (the GSEs) on Thursday that they must conform to a new state mortgage modification requirement.  In a letter sent to Acting FHFA Directed Edward J. DeMarco on Thursday, Coakley invoked a law signed by Governor DeVal Patrick earlier this month requiring creditors to take "commercially reasonable steps" to avoid foreclosure upon certain mortgage loans.  In the letter Coakley also urged FHFA to reconsider its decision to forbid the GSEs from reducing principal on distressed loans.

 "We expect Fannie Mae and Freddie Mac, like all creditors, to comply with these statutory obligations as they conduct business in Massachusetts," Coakley wrote. "Specifically, we expect that Fannie Mae and Freddie Mac will pursue common-sense loan modifications for borrowers when the economic benefits of a modified loan exceed the significant losses anticipated at foreclosure.  These loan modifications are critical to assisting distressed homeowners, avoiding unnecessary foreclosures, and restoring a healthy economy in our Commonwealth."

This is not Coakley's first exchange with FHFA over loan modifications.  In February she urged the agency to engage in loan modifications guided by a net-present value analysis.  She also joined with ten other state attorneys general in an April letter to DeMarco seeking relief for homeowners and argued that the failure to implement principal loan forgiveness harms struggling homeowners and investors.

FHFA recently announced that the GSEs would not be participating in the Home Affordable Modification Program Principle Reduction Alternative (HAMP PRA) despite an offer of incentives from the Department of the Treasury to do so.  Coakley's office pointed out that FHFA's own study concluded that "principal reduction leads to a 20% reduction in re-default probabilities as compared to a modification utilizing forbearance, and principal reduction leads to a 24% reduction in re-default probabilities as compared to a modification that receives payment reduction, but neither forgiveness nor forbearance. The conclusions drawn by the study are consistent with another analysis, completed by FHFA, in which the HAMP PRA could help up to 500,000 homeowners and save Fannie Mae and Freddie Mac up to $3.6 billion."

"This data demonstrates that, in appropriate cases, loan modifications providing principal forgiveness can help struggling homeowners avoid foreclosure, save taxpayers' money, and work to stabilize the housing market - all stated goals of the FHFA," Coakley said.