In the alphabet soup of federal agencies with their mitts stuck in to the housing crisis, four lesser-known letters may have the biggest pull of all – FHFA, or the Federal Housing Finance Agency.

The regulatory agency is the legal guardian of wayward government-sponsored entities (GSEs) Fannie and Freddie. But in recent months, the agency – and its leader – are drawing increased scrutiny as to whether its time in charge of Fannie and Freddie’s fate has been too focused on their bottom lines, instead of their outsized impact on the housing market.

The agency came into being in 2008, when Freddie and Fannie were on the verge of collapse and were taken over by the federal government and put into conservatorship. President Bush appointed James Lockhart to lead the agency in the first year of its existence. When Lockhart left for a position at a private equity firm, the role was taken over by Ed DeMarco, a career bureaucrat. President Obama has attempted to insert his own appointee, but the Senate has so far spiked his nominees.

Under DeMarco, the agency has hewed closely to its original charge when the GSEs were put into conservatorship – to return Fannie and Freddie to a sound fiscal footing and get them off the public teat.

In a 2011 letter to Congress last explaining his interpretation of the agency’s proper role, DeMarco wrote that FHFA and the Fannie and Freddie boards were, “focused on conserving assets, minimizing corporate losses, ensuring the Enterprises continue to serve their mission, overseeing remediation of identified weaknesses in corporate operations and risk management, and ensuring that sound corporate governance principles are followed.”

Slow Going

But that laser focus on getting Fannie and Freddie back in black has led their overseeing agency to resist several federal efforts to jump-start the housing market, fearful they might impose risks to the GSEs’ balance sheet.

The Obama administration, for example, attempted to create a loan program that would incentivize homeowners to undertake energy efficient remodeling – a task that would have helped some idle construction workers get back to work during the depths of the housing doldrums. But the FHFA balked at participation, believing it would impact the GSEs’ status as first lien holder, and potentially impair their ability to recoup losses in the event an owner defaulted.

More recently, however, it’s the GSEs – and the FHFA’s – record on loan modifications that have come under scrutiny. The agencies’ record on loan modifications has been mixed. According to the latest report by the FHFA on its foreclosure prevention efforts, under the 2009 Home Affordable Modification Program (HAMP), more than 395,000 homeowners have received permanent loan modifications.

That’s a far cry from the million-plus homeowners the program was intended to reach. And in recent months, the number of people in trial modifications has declined steeply, even as the overall delinquency rate among U.S. mortgages has remained steady. Only loans originated before Jan. 1, 2009, are eligible for HAMP.

Overall, the agency completed only 298,022 loan modifications through November 2011, as compared to 575,022 in 2010. If loans continued to be modified at a similar rate through the end of last year, that would be a drop of more than 40 percent in completed loan modifications compared to 2010. While the GSE’s have been stepping up short sale and deeds-in-lieu transactions, overall “total foreclosure prevention actions” will be projected to be down almost 30 percent.

Strong Critiques

Along with the slow pace of new modifications, the FHFA has also come under fire for refusing to consider principal reductions, a key component of the $25 billion settlement reached by the states’ attorneys general and the major servicing firms. Earlier this month, Massachusetts Attorney General Martha Coakley wrote a hectoring letter to DeMarco labeling the FHFA’s “unwillingness to engage in principal write-downs…troubling.”

“Preservation of assets and foreclosure prevention are not conflicting goals and can both be achieved by offering loan modifications when the net present value of the loan modification is greater than the net present value of a foreclosure,” Coakley wrote, calling upon the FHFA to step up its modification pace.

That critique was echoed by a second letter signed by Massachusetts Congressmen Barney Frank, Michael Capuano and Stephen Lynch, and in a speech by William Dudley, president of the Federal Reserve Bank of New York. Dudley singled out Fannie’s tough pushback policy and unwillingness to offer principal modifications as significant factors holding back housing recovery.

“Based on recent data on borrower behavior, my staff calculates that the taxpayer…would be better off with earned principal reduction,” Dudley said, even if house prices stay flat and jobs growth weak.

But even those strong critiques of its stance don’t seem to have moved the agency. Indeed, in a recent filing in an important case before the Massachusetts Supreme Judicial Court, Eaton v. Fannie Mae, the FHFA filed a rare amicus brief. In it, the agency hinted that if the court were to rule against Fannie (potentially clouding thousands of titles) the FHFA might go ahead and defy the court’s ruling.

The FHFA suggested that its Congressional mandate as conservator “would apply to bar actions to rescind past foreclosure sales deemed void…by this Court where such an action would restrain or affect the operation of [Fannie and Freddie].”