August 23, 2012 / 7:04 PM / 7 years ago

Massachusetts tells Fannie, Freddie to follow new mortgage law

WASHINGTON (Reuters) - Massachusetts on Thursday told Fannie Mae FNMA.OB and Freddie Mac FMCC.OB 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 state Attorney General, Martha 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.

Reporting by Rachelle Younglai and Aruna Viswanatha; Editing by Leslie Adler and Andrew Hay

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