The California attorney general has called on Fannie Mae and Freddie Mac to offer mortgage debt relief to homeowners in the state by cutting the principal amounts they owe on their home loans, a suggestion the federally-backed companies have long resisted.

Attorney general Kamala Harris faces pressure to get a better deal for California homeowners than proposals discussed in long-running multi-state talks between state and federal officials and top banks to settle alleged mortgage abuses committed by the banks. Harris pulled out of those talks in September, claiming that the proposed $25 billion settlement with five banks to resolve allegations of improper foreclosures and other misconduct released the banks from too many claims and failed to provide enough debt relief for California homeowners.

Although the proposal included $15 billion in principal reductions and other loan modifications for distressed borrowers, none of the relief applied to mortgage loans owned by Fannie Mae or Freddie Mac, even though the majority of the estimated 11 million underwater mortgages in the United States are owned by the companies. Since Harris left the talks, negotiators have added from $2 billion to $5 billion to the settlement to help underwater borrowers who are current on their payments to refinance loans not held by Fannie Mae or Freddie Mac.

“It has become clear to me that the only way to keep distressed California homeowners in their homes is through meaningful principal reduction,” Harris said in a statement last week (“Calif. Asks Fannie, Freddie To Cut Mortgage Debt,” Thomson Reuters, Nov. 3, 2011).

Harris said that the regulator of Fannie Mae and Freddie Mac, Edward DeMarco, should resign if he failed to support principal reductions on underwater mortgages owned by the agencies. DeMarco said that offering mortgage debt relief to homeowners through principal reductions would reduce the value of taxpayer assets. At a U.S. House of Representatives financial services subcommittee hearing last week, DeMarco said that if Congress wants to use taxpayer funds to reduce principal mortgage debt, it must change the law.

Since being seized by the government and placed into conservatorship in Sept. 2008, Fannie Mae and Freddie Mac have been propped up with about $145 billion in taxpayer money.

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