The top housing regulator rebuffed the offer of taxpayer funds to reduce mortgages held by struggling homeowners on Tuesday, a blow to the Obama administration which is keen to show voters it can help fix the housing market.
Calling it a challenging decision, the regulator for Fannie Mae and Freddie Mac said using funds from the Troubled Asset Relief Program would not make a meaningful improvement in reducing foreclosures in a cost-effective way for taxpayers.
"The anticipated benefits do not outweigh the costs and risks," the Federal Housing Finance Agency's head Edward DeMarco told reporters.
The administration has been pressuring DeMarco to allow the government-controlled mortgage financing agencies to do more principal writedowns. But DeMarco has maintained that this would needlessly drive up the costs of their taxpayer bailout.
Fannie Mae and Freddie Mac, whose government bailout has meant taxpayers have provided nearly $190 billion to keep them afloat, were seized by the government in 2008 amid threats of insolvency due to losses on subprime loans.
Treasury Secretary Timothy Geithner told DeMarco in a letter released to media he was concerned about the regulator's continued opposition and urged the acting director to reconsider his decision.
"I do not believe it is the best decision for the country," Geithner said.
The use of targeted principal reduction would "provide much needed help to a significant number of troubled homeowners, help repair the nation's housing market and result in a net benefit to taxpayers," he added.
The administration has struggled to revive the housing market, where 22 million homeowners are underwater or owe more than their properties are worth.
Although the regulator found that using the taxpayer bailout funds could result in about 74,000 to 248,000 borrowers being eligible for the mortgage reductions, it said "nearly all of this benefit is simply a transfer from taxpayers" to the government-controlled enterprises and would rack up taxpayers' tab.
Implementing the program "would actually increase taxpayer costs," DeMarco said in a letter to lawmakers announcing the decision.
After conducting a six-month study on whether to use the taxpayer funds, DeMarco's agency concluded that the program would not only be costly and time consuming to implement but that it could also send the wrong message to troubled borrowers and create incentives to strategically default in order to win a mortgage reduction from the government.
Fannie and Freddie, the two largest sources of housing money, were taken over by the government in September 2008 during the financial crisis.