WASHINGTON Dec 8 (Reuters) - The Obama administration is frustrated mortgage finance giants Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) are not participating in a government program to reduce principal for borrowers who owe more than their home is worth.
The Federal Housing Administration earlier this year announced a program that would provide government incentives to lenders who reduce principal for borrowers who are current on a mortgage whose balance exceeds the home's worth.
But the "short refi" program has won little participation--just three modifications of 61 applications. Mortgage finance giants Fannie Mae and Freddie Mac are not interested in principal write-downs.
"To simply not implement the program outright is shortsighted," Federal Housing Administration Commissioner David Stevens told Reuters on Wednesday in a telephone interview.
Stevens said lenders should cut bait sooner rather than later to avoid possible further losses if housing prices continue to fall.
"Much of that could be saved by utilizing short refi for borrowers who could qualify," he said, adding that by writing down principal now "really pays them off from any future risk has real economic value to these institutions."
A spokeswoman for Fannie Mae did not respond to a request for comment and a spokesman for Freddie Mac declined comment.
RealtyTrac, a foreclosure marketplace and tracking service, on Tuesday predicted record high foreclosure levels, rising mortgage rates and a glut of distressed properties dampening the market for years to come.
"We don't see a full market recovery until 2014," RealtyTrac executive Rick Sharga said. He expects that more than 3 million homeowners will receive foreclosure notices in 2010, with more than 1 million homes being seized by banks before the end of the year.
The federal government took control of Fannie Mae and Freddie Mac in 2008 and they are now under the conservatorship of their regulator, the Federal Housing Finance Agency.
FHFA's position on the FHA short refi program is not clear. FHFA officials have recently said the program is "under review," but a spokeswoman on Wednesday declined to reiterate that position.
U.S. President Barack Obama last month tapped North Carolina's commissioner of banks, Joseph Smith, to head the FHFA; his confirmation hearing before the Senate Banking Committee is scheduled for Thursday. (Reporting by Corbett B. Daly; Editing by Leslie Adler)