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From the latimes.com:

Reporting from Washington—

The regulator over Fannie Mae and Freddie Mac pushed back against mounting pressure that the mortgage finance giants start reducing the principal owed on troubled loans, insisting the practice could hurt taxpayers and that alternatives were better at avoiding foreclosures.

Edward J. DeMarco, acting director of the Federal Housing Finance Agency, told U.S. senators Tuesday that reducing the principal on mortgages owned or guaranteed by Fannie and Freddie would not protect taxpayers.

The government has pumped about $183 billion in taxpayer money into the companies, which the agency seized in 2008 as they teetered on the brink of bankruptcy.

Lawmakers, especially Democrats, have maintained that the agency needed to direct Fannie and Freddie to write down the mortgage principal on loans that exceeded the value of homes when struggling borrowers were facing foreclosures.

Five of the nation’s major banks agreed to similar terms to settle a nationwide lawsuit. Fannie and Freddie, which own or guarantee 60% of existing mortgages and back 75% of all new mortgages, was not part of that lawsuit.

DeMarco said executives at Fannie and Freddie advised him that it wasn’t “in the best interest of the companies” to write down mortgage principal to reduce foreclosures. The companies would lose part of the total amounts lent out.

He touted other steps, such as interest rate reductions that Fannie and Freddie have approved, to help keep struggling homeowners from defaulting.

“Foreclosure is the worst possible outcome in most instances. It is the most costly, it is the most devastating to the family, and it is the most devastating to the neighborhood,” DeMarco told the Senate Banking Committee.

The agency has “a responsibility to find all prudent actions” to prevent foreclosures, he said. Refinancing, modifying the lengths of loans and deferring payments on mortgage principal are more effective at keeping people in their homes without increasing the risk of losses at Fannie and Freddie, DeMarco said.

Democrats argued that principal reductions would help stabilize the housing market, ultimately reducing taxpayer losses on the Fannie and Freddie bailout because mortgages would not end up in foreclosures.

“In my view, the FHFA has shown a dismal lack of initiative in the housing crisis and needs to be far more aggressive in taking steps that can help both homeowners and taxpayers,” said Sen. Robert Menendez (D-N.J.).

“The banks are finding it profitable to give principal reductions to about 20% of their own loans while, ironically, the government isn’t allowing principal reductions on any loans,” he said.

Housing and Urban Development Secretary Shaun Donovan said that principal reduction was the one foreclosure-prevention tool that the administration has made the least progress in employing.

But FHFA is an independent agency. DeMarco had been chief operating officer at the agency and became acting director in 2009. The White House has tried to replace him, but Senate Republicans blocked confirmation of President Obama’s nominee for the job.

Republicans, who oppose more government intervention in the housing market, praised DeMarco. But he acknowledged that “there appears to be a lot of criticism” of his performance.

California Atty. Gen. Kamala D. Harris has called on DeMarco to resign.

In a letter released Monday, she asked him to freeze foreclosures in the state until the agency did a “thorough, transparent analysis of whether principal reduction is in the best interests of struggling homeowners as well as taxpayers.”

Also Monday, 115 House members wrote to DeMarco to urge him to allow Fannie and Freddie to write down loan principals.

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