Thirty Democratic senators are urging the Federal Housing Finance Agency (FHFA) to evaluate the use of principal reduction as a “targeted solution” for assisting underwater borrowers with Fannie Mae and Freddie Mac loans.

In a letter to the GSE regulator, the senators note that FHFA provided Congress with an analysis that looked at applying principal reductions to all three million Fannie and Freddie borrowers that are underwater and owe more on their mortgage than the value of the property.

That analysis concluded that reducing the principal balance on that many mortgages would require $100 billion and FHFA could not justify imposing such a cost on the taxpayers.

The senators want FHFA to conduct a new analysis where principal reduction is offered to certain underwater homeowners -- such as delinquent borrowers who don't have mortgage insurance to defer the costs of a default.

FHFA data shows Fannie and Freddie have 750,000 underwater loans that are 90 days or more past due.

Instead of taking an “all or nothing approach,” the senators' write, “it's possible that principal forgiveness may yield better taxpayer results for certain categories of borrowers, while principal forbearance would be appropriate for others.”

FHFA acting director Edward DeMarco prefers principal forbearance as a less costly alternative -- the borrower doesn't have to pay interest on a portion of the loan balance that is temporarily reduced. In a principal reduction modification, the principal amount of the loan is permanently forgiven and written off.

The senators also point out in the April 4 letter that the Treasury Department has tripled its incentive fees for Home Affordable Modification Program principal reductions. And the new analysis should take the higher fees into account.

“Since FHFA's own analysis concluded that principal forbearance would only be marginally better for taxpayers than principal forgiveness, it would not be surprising if this factor alone changed the results,” the April 4 letter said.

DeMarco has been fending off mounting pressure from the Obama administration and Democratic lawmakers to allow principal reductions for several months. Republican lawmakers have supported DeMarco's resistance to principal reduction.

FHFA is conducting a new analysis in light of the higher fees that Treasury will pay to Fannie and Freddie to defer the costs of principal reductions.

The GSE regulator intends to announce his decision relating to principal reductions sometime in April.

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