Gov't bars Fannie-Freddie from reducing principal

DeMarco said an extensive analysis by the FHFA found the potential benefit was too small compared with the costs and risks. The risks include as many as 19,000 borrowers strategically defaulting on their loans, according to the analysis.

Geithner said allowing Fannie and Freddie to do "targeted" reductions of principal for troubled borrowers would provide much-needed help to a significant number of troubled homeowners. He said that would help repair the nation's housing market and result in a net benefit to taxpayers.

The government rescued Fannie

The government rescued Fannie and Freddie in September 2008 to cover losses on soured mortgage loans. Since at the time the FHFA, which is independent of the administration, has controlled their financial decisions.

U.S. taxpayers have spent in broad outline $170 billion to rescue the companies. It could cost approximately $260 billion more to support them through 2014 afterwards subtracting dividend payments, according to the government.

The Treasury Department said in January that it

The Treasury Department said in January that it would cover part of the cost if Fannie and Freddie could reduce principal when they modify mortgages for troubled borrowers. The department said it would use unspent housing rescue money from the $700 billion Troubled Asset Relief Program, or TARP.