Nine state attorneys general have sent a letter to President Obama, Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell demanding new leadership at the Federal Housing Finance Agency (FHFA).  The letter, which effectively calls for Acting FHFA Director Edward J. DeMarco to be fired, was sent Friday by the group spearheaded by Massachusetts' AG Martha Coakley and New York's Eric Schneiderman.

The AGs said they have spent several years grappling with the outgrowth of subprime and predatory lending practices and the resulting foreclosure crisis and that loan modifications have been a key component to bringing relief to distressed borrowers and repairing the economy.  "We have seen firsthand the positive impact of mortgage modifications, often including principal write-downs, on our housing market, economy, and communities. In fact, principal write-downs are a central component of the national settlement, negotiated by the federal government and a bi-partisan group of 49 state attorneys general, that was entered into with five major banks approximately one year ago,' the letter states.

The AGs say that principal write-downs help could help many more families avoid unnecessary foreclosure but "FHFA's refusal to adjust its policies to allow for principal forgiveness and forbearance stands as a major impediment to addressing the foreclosure crisis."

DeMarco has consistently stood by his decision to prevent the two government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae from using principal reductions as a method of modifying loans even though the Home Affordable Modification Program (HAMP) in which FHFA plays a major role actively encourages lenders to use its Principal Reduction Alternative (PRA) to make modifications more affordable to homeowners.  DeMarco maintains his decision is consistent with FHFA's goal as conservator of the GSEs to preserve their assets and save taxpayer money.

The AG's letter states, "FHFA's continued position that principal forgiveness conflicts with its goal of asset preservation is not supported by reality. The FHFA's current policy actually reduces the value of its holdings portfolio. It is far more profitable for any financial institution to hold a portfolio of performing $200,000 mortgages that keeps families in their homes than a portfolio of non-performing $250,000 mortgages headed toward default. "(Emphasis is theirs)

Coakley had called for DeMarco's removal back in February and the Wall Street Journal reported at that time that the administration was about to name a replacement. Principal reduction has also been the source of some testy exchanges between DeMarco and Democratic members of the House Financial Services Committee, especially Representative Elijah Cummings (D-MD).  Last month 45 Democratic House members led by Cummings also asked President Obama to appoint a permanent head of FHFA.  His firing has also been demanded by a number of housing advocacy groups and by Nobel Economist Paul Krugman. 

Administration sources have said a new director would probably have to be a recess appointment because Senate Republicans are also opposed to allowing Freddie Mac and Fannie Mae to write down mortgages and would refuse to confirm a new director who might approve that action.  The confirmation of Obama's original nominee, Josepha Smith, was not permitted an up or down vote by Republicans in the Senate.  DeMarco has been acting director since 2009 and was originally appointed to FHFA by President George W. Bush.

The letter from the attorneys general concludes, "We have worked tirelessly, along with our federal, state, and local partners to develop a multi-pronged approach to dealing with the foreclosure crisis. Fannie Mae and Freddie Mac should be among our partners in this effort, and leaders in the arena of loan modification best practices. Instead, they have been an obstruction. We believe that until new, permanent leadership is named to FHFA, they will continue to stand as a roadblock to comprehensively addressing the foreclosure crisis.

In addition to Coakley and Schneiderman the letter was signed by Kamala D. Harris, California; Beau Biden, Delaware; Lisa Madigan, Illinois; Douglas F. Gansler, Maryland; Catherine Cortez Masto, Nevada; Bob Ferguson, Washington; and Ellen Rosenblum, Oregon.