Top law enforcement officials in several states are signaling they will pressure Fannie Mae and Freddie Mac to correct what is widely seen as one of the biggest deficiencies of the $25 billion mortgage settlement announced on Thursday: It simply doesn't help that many homeowners.
 

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Borrowers whose loans are backed by the government-controlled mortgage giants -- nearly half of all outstanding mortgages in the United States -- are not eligible for payouts under the deal. State officials who negotiated the deal say they could not convince Fannie Mae and Freddie Mac, or the Federal Housing Finance Agency, which oversees the loan giants, to join onto the settlement because they are steadfastly opposed to principal reductions -- loan write-downs for borrowers whose homes are at risk of foreclosure.

"This is a glaring weakness of the overall settlement," said one state official who spoke on condition of anonymity. "Fannie and Freddie were absolutely opposed to principal reduction. You'd ask why, and they'd say 'moral hazard to the taxpayer.'"

So far, the mortgage giants and the FHFA have only said that they're avoiding principal reduction because of the cost to taxpayers.

Principal reductions are hailed by many economists and housing experts as the most effective way to help homeowners who are underwater on their mortgages, owing more than the home is worth. About 1 in 5 homes in the U.S. are currently underwater.

The attorneys general of New York, California and Massachusetts have all said in recent days that they are disappointed that Fannie Mae and Freddie Mac were not part of the settlement, and that they plan to continue pressuring the mortgage giants to write-down loans.

New York Attorney General Eric Schneiderman, whom President Obama tapped in January to head a task force that will investigate financial fraud leading up to the market crash of 2008, likely has the most leverage. Schniederman has said the new unit will investigate wrongdoing in the packaging and guaranteeing of home loans. He is already working with the FHFA's inspector general as part of this probe, which is expected to include serious scrutiny of Fannie Mae and Freddie Mac's behavior.

Source: The Huffington Post | Ben Hallman / Bonnie Kavoussi