The regulator for Fannie Mae and Freddie Mac told lawmakers that forcing the government-controlled mortgage firms to write down the principal on underwater home loans would require more than $100 billion in fresh taxpayer funds.

In a letter sent on Friday to the Republican and Democratic leaders of a House of Representatives government oversight panel, the Federal Housing Finance Agency explained why it has long opposed principal reductions for borrowers who owe more than their homes are worth. In that situation, the mortgage is deemed underwater.

About 22 percent of U.S. home mortgages have negative equity totaling about $750 billion, meaning that about one in five U.S. home mortgages is underwater with the amount owed exceeding the home's value, according to CoreLogic, a financial information and analytics company based in Santa Ana, California.

The Federal Housing Finance Agency said it had determined that such reductions would be more costly for Fannie Mae and Freddie Mac than forbearance, which was the less expensive option by comparison. The two mortgage firms have been using forbearance to help borrowers struggling to make payments.

Forbearance lets the borrow reduce or suspend payments on a loan for a specific amount of time.

The regulator, also known as the FHFA, has been under pressure from Democrats to permit the writedown of principal by the two government-controlled mortgage finance providers as a way to help some of the millions of U.S. homeowners whose mortgages are underwater.

Representative Elijah Cummings of Maryland, the top Democrat on the House Oversight and Government Reform Committee, has pushed the housing regulator to explain its thinking in deciding not to offer principal reductions.


The FHFA, however, has maintained that widespread principal forgiveness would undercut the finances of Fannie and Freddie, which have already received about $169 billion in taxpayer aid. Republicans have supported the FHFA's decision.

FHFA has a statutory responsibility as conservator to preserve and conserve the assets and property of the regulated entities, FHFA's acting director, Edward DeMarco, wrote in the letter to lawmakers dated January 20.

The Obama administration wants to secure widespread principal reductions in a legal settlement between the government and some of the biggest mortgage servicers. The settlement is aimed at cleaning up alleged foreclosure abuses.

Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action, DeMarco said in the letter.

In 2008, Fannie Mae and Freddie Mac were taken over by the government as mortgage losses mounted. Millions of loans issued during the housing bubble, many of them made to subprime borrowers with spotty credit histories, soured after the housing bust -- yet they remain on Fannie's and Freddie's books. Delinquencies on those loans continue to rise.

Fannie Mae and Freddie Mac own or guarantee roughly half of all outstanding mortgages in the United States. Of the approximately 30 million mortgages guaranteed by the two firms, close to 3 million of those loans were held by underwater borrowers as of last summer, according to an analysis provided in the letter.

Another barrier to principal writedowns, aside from pushing losses at the two firms even higher, DeMarco said, was the cost associated with new technology and training to servicers that would be needed to launch a program that offers principal forgiveness.

The FHFA told lawmakers that forbearance is a less costly option. Principal forbearance limits accounting losses and allows Fannie and Freddie to recoup the principal at some later point, according to the regulatory agency's letter.

The net result of the analysis is that forbearance achieves marginally lower losses for the taxpayer than forgiveness, although both forgiveness and forbearance reduce the borrower's payment to the same affordable level, the FHFA's letter said.

The housing regulator also assured lawmakers that the FHFA remains committed to helping borrowers stay in their homes and will continue to work on such principal forbearance plans and government initiatives to modify or refinance loans.

The Federal Reserve, in a white paper to Congress earlier this month, said writedowns had the potential to decrease the probability of default and improve migration between labor markets.

However, the Fed stopped short of endorsing such an initiative and noted concern that writing down loan balances would create a moral hazard - the concept that rescue efforts breed further behavior that exacerbates the existing problem - and could prompt other borrowers to stop making timely loan payments.

(Reporting By Margaret Chadbourn; Editing by Jan Paschal)