The Federal Housing Finance Agency (FHFA) late Tuesday revealed that it gave Fannie Mae the green light to conduct a pilot program with Wells Fargo in March 2010 to test principal reduction modifications.

The agency, in a newly disclosed letter to Congress, revealed the approval, after Reps. Elijah Cummings, D-Md., and John Tierney, D-Mass., discovered that Fannie developed a similar pilot program with Citibank, which FHFA acting director Edward DeMarco had not disclosed to the lawmakers.

The ranking Democrats on the House Oversight Committee have been pressing the FHFA to permit the GSEs to offer principal reduction modifications to underwater borrowers, but DeMarco continues to raise objections to the idea.

“We have very serious concerns about your public statements, your previous responses to us, and your failure to provide Congress with complete and accurate information about these important matters,” the two lawmakers said in a May 1 letter to the GSE regulator.

In response, DeMarco later in the day revealed that Fannie and Freddie Mac conducted several pilot programs involving principal forgiveness. “Operational concerns were the key determining factor in not pursuing or ending the pilot programs,” DeMarco said in his letter.

The Fannie/Wells Fargo pilot program appears to have been botched in the submission of loan data to Fannie that resulted in errors, based on the documents FHFA attached to DeMarco’s letter.

The FHFA director contends the pilot programs demonstrate that the agency continues to take a “strict analytic approach” in evaluating the impact a principal forgiveness program.

“The fact that the FHFA continues to consider principal forgiveness alternatives, including recent HAMP changes initiated by the Treasury Department belies any ideological tilt on our part,” DeMarco said.

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