Massachusetts Attorney General Martha Coakley told Fannie Mae and Freddie Mac on Thursday that the two government-controlled mortgage finance companies would be required to offer "commercially reasonable loan modifications" under a new law in the state.
The notification, in a letter from Coakley to the regulator of Fannie and Freddie, raises the stakes in a dispute between the two over the benefits of cutting mortgage debt for struggling homeowners.
"I write to inform you of the new Massachusetts law requiring all creditors, including Fannie Mae and Freddie Mac, to take commercially reasonable steps to avoid foreclosure upon certain mortgage loans," Coakley said in the letter to Ed DeMarco, director of the Federal Housing Finance Agency.
An FHFA spokeswoman said the agency is reviewing the letter and will respond soon.
Coakley said the new law "highlights the imperative of preventing unnecessary foreclosures" and promotes the idea that cutting mortgage debt is one useful tool.
While the law doesn’t require creditors to specifically cut mortgage debt, Coakley said, it "does advance the consensus" that creditors can receive higher recoveries when using strategies that include reducing mortgage debt for some borrowers.
Creditors "will be required to take commercially reasonable steps and principal forgiveness may be a commercially reasonable step in certain instances," a spokeswoman for Coakley said.
DeMarco has long resisted cutting mortgage principal on the loans that Freddie Mac and Fannie Mae own. In July he rejected an Obama administration plan to use funds from the government’s bank bailout program to do so, and has said it could reduce the value of taxpayer assets.
In February, Coakley sent DeMarco a letter urging him to consider forgiving principal on certain loans.
On Thursday Coakley again asked DeMarco to reconsider his position on the modifications.
"We expect Fannie Mae and Freddie Mac, like all creditors, to comply with these statutory obligations as they conduct business in Massachusetts," Coakley said in the letter. "Specifically, we expect that Fannie Mae and Freddie Mac will pursue common-sense loan modifications for borrowers when the economic benefits of a modified loan exceed the significant losses anticipated at foreclosure. These loan modifications are critical to assisting distressed homeowners, avoiding unnecessary foreclosures, and restoring a healthy economy in our commonwealth."
