Fannie-Freddie regulator eyes loan cuts

The federal regulator who oversees Fannie Mae and Freddie Mac is softening his position against allowing the mortgage giants to reduce principal for U.S. borrowers at risk of foreclosure.

Edward DeMarco, acting director of the Federal Housing Finance Agency, said in a speech Tuesday that the agency is considering whether to allow Fannie and Freddie to offer principal reductions. And he said mortgage principal reductions would lower losses at Fannie and Freddie and help stabilize home prices faster.

Yet, DeMarco still says the agency must weigh the reductions against losses to taxpayers, who already have spent $170 billion to bail out the companies. Allowing reductions could lead to a rise in borrowers who strategically default on their loans, he warns. And fewer than 1 million homeowners would be eligible for principal reductions -- a fraction of the estimated 11 million Americans who owe more on their mortgages than their homes are worth, he said.

The agency will make a final decision on principal reductions by the end of the month. A spokeswoman for the agency said that DeMarco's long-standing resistance to allowing principal write-downs hasn't changed.

Still, the subtle shift in his tone suggests he may be feeling pressure from lawmakers and officials in the Obama administration, who have pushed for principal reductions by Fannie and Freddie.

Rep. Elijah Cummings (D-Md.) said he was "encouraged that Mr. DeMarco has now begun to move in this direction." Cummings and others say Fannie and Freddie's efforts to help homeowners who owe more on their mortgages than their homes are worth have fallen short.

Treasury Secretary Timothy Geithner told a Senate subcommittee last month that he thought officials at Fannie and Freddie support the idea of principal write-downs, despite DeMarco's reservations.