Attorney General Martha Coakley has sent a letter to the Federal Housing Finance Agency (FHFA) urging Fannie and Freddie to engage in principal forgiveness and loan modifications for struggling homeowners.

Coakley argues principal forgiveness, based on net present-value of the loans, is an "essential tool to prevent foreclosures," and that the GSEs’ stubbornness in refusing to allow the loans is holding back the economy, given their dominance of the housing market.

"More than 5 million people have lost their homes due to foreclosure in the past five years, and millions more on the brink of foreclosure, struggling to stay in their homes," wrote Coakley.

"Fannie Mae and Freddie Mac should be a leader in the arena of loan modification best practices, not an obstruction.  Fannie Mae and Freddie Mac should change course to serve both their own interests and those of the public and the economy."

Coakley has brought numerous actions against major banks and financial institutions with the goal of keeping people in their homes and avoiding unnecessary foreclosures, including actions against Fremont, Option One, Countrywide, Morgan Stanley, Goldman Sachs and Royal Bank of Scotland. All have produced settlements which included loan modifications designed to remedy unfair and unsustainable loans in Massachusetts. 

The FHFA has acknowledged in Congressional testimony that principal forgiveness can serve the long-term interests of taxpayers, often costing less than foreclosing on a home a reselling it, given the damage a foreclosure does to a home’s value. Yet according to the FHFA’s own reports, fewer loan modifications have been implemented in September, October and November 2011, than any other month since November 2010. Coakley wants that trend reversed.

Coakley also refers to the long-rumored settlement between the major banks and the 50 state’s attorneys general over robo-signing and other allegations, which is likely to include billions in principal write-downs. The settlement talks "have brought into focus the unwillingness of Fannie Mae and Freddie Mac – though backed by U.S. taxpayers and charged with avoiding unwarranted foreclosures – to use principal write-downs as part of its loan modification programs," Coakley wrote.

The letter gives no hint about Coakley’s own willingness to sign on to that settlement. Last month, she sued several major lenders and servicers alleging they had engaged in fraud and mismanagement in regard to both their foreclosure and loan modification procedures which had resulted in unnecessary foreclosures.