WASHINGTON (Reuters) - Two Democratic lawmakers on Wednesday accused the regulator of Fannie Mae and Freddie Mac from blocking the firms from reducing principal on the mortgages they back for reasons of "ideology."
Representatives Elijah Cummings and John Tierney claimed that analysis from the regulator itself, the Federal Housing Finance Agency, showed that principal reduction would serve the interest of U.S. taxpayers, who have bailed the firms out to the tune of $169 billion.
They said the analysis directly contradicted testimony from the acting director of the agency, Edward DeMarco, who has said loan forbearance - which grants temporary suspensions of payments to borrowers, but does not reduce their obligations - provides the same benefit for homeowners at a lower cost to taxpayers.
"It appears that your refusal to follow Congress' direction and allow principal reduction programs is based more on ideology and the fear of political backlash than on a straightforward analysis of the interests of American taxpayers," the lawmakers wrote in a letter to DeMarco.
The Obama administration, some Federal Reserve officials and Democrats on Capitol Hill have pressured the FHFA to allow reductions in loan balances for borrowers who are "underwater," meaning their loan balance exceeds the value of their home.
DeMarco has argued that allowing principal writedowns would go against his primary mandate of protecting assets of at the two mortgage finance firms, which were seized by the government in September 2008 as home loan losses spiraled.
Cummings and Tierney also said a former Fannie Mae official had come forward and claimed the company had started to develop a pilot program to slash loan balances for troubled borrowers in 2010. According to the letter, the pilot program was canceled shortly before it was set to launch because of resistance from senior executives, the unnamed former employee said.
The program had preliminary approvals from officials at Fannie Mae, FHFA, and the Office of the Comptroller of the Currency, which regulates national banks, according to the former employee.
Two weeks ahead of its launch, the program was "terminated by senior officials at Fannie Mae who were 'philosophically opposed' to the concept of reducing principal," the former employee told congressional staff.
"FHFA stands by its analysis of principal forgiveness. We will soon respond to the congressmen's' letter," FHFA spokesperson Corinne Russell said.
Fannie Mae declined immediate comment on the letter.
Last year, Cummings, the top Democrat on the House Oversight and Government Reform Committee, had asked DeMarco to explain his thinking in deciding not to offer principal reductions.
DeMarco provided lawmakers with an analysis completed in 2010. In a letter dated January 20 that accompanied the analysis, DeMarco again signaled that principal forbearance might be a cost-effective way for Fannie and Freddie to dampen the foreclosure crisis.
Fannie Mae and Freddie Mac own or guarantee roughly half of all outstanding mortgages in the United States. Some economists, consumer groups and affordable housing advocates argue that more aggressive actions by the firms to help troubled borrowers would minimize taxpayer losses in the long run by preventing defaults in the near term.
(Reporting by Margaret Chadbourn; editing by Leslie Adler, Gary Crosse)