Inside the mortgage crisis today. U.S. Secretary of the Treasury Timothy Geithner told a subcommittee of the Senate Appropriations Committee March 28 that he believes officials at both Fannie Mae and Freddie Mac favor mortgage write-downs for underwater borrowers, despite resistance from the agencies’ regulator, the Federal Housing Finance Agency, Bloomberg reported.

While the Obama administration has continued to pressure the FHFA to offer principal reductions, the agency’s Acting Director Edward J. DeMarco has persistently refused, explaining his contention that write-downs do not make economic sense for the two government-sponsored enterprises, Bloomberg reported. DeMarco noted that such an action could create a “moral hazard” where borrowers who are current on their mortgages would begin to strategically default.

At the end of 2011, 12.1 percent of mortgages were delinquent or in foreclosure, according to data from the Office of the Comptroller of the Currency. The mortgage delinquency rate was 12.4 percent in 2010.

“We think there is a strong case in some circumstances to add principal reduction as part of the (GSE) strategy to maximize return to the taxpayer,” Geithner told Congress, according to Bloomberg. To date, the government takeover of the GSEs in 2008 has cost taxpayers $151 billion.

In a Jan. 20 letter to Congress, DeMarco said principal write-downs could cost taxpayers an additional $100 billion.

HousingWire reported March 28 that 11 million borrowers are underwater, and four million of those hold Fannie or Freddie mortgages. Darius Kingsley, chief of the Homeownership Preservation Office at the U.S. Department of the Treasury, told HousingWire that borrowers feel more invested in their homes when their loan-to-value ratios are reduced and exist below 120 percent. “For many borrowers, if you go over that percentage, they often feel they’ve become a renter, not an owner,” he told HousingWire.

In January, the Home Affordable Modification Program was revised to include increased incentives, including the Treasury’s offer to triple incentives to servicers who offered principal write-downs. Those incentives would apply to Fannie and Freddie as well if the FHFA would allow it.

The FHFA said it would be releasing a study this month on whether or not loan forgiveness makes economic sense for the GSEs, Bloomberg reported

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