Ideology and not economics may have killed a Fannie Mae principal reduction program in 2010, according to two Democratic congressmen.

Reps. Elijah Cummings, D-Md., and John Tierney, D-Mass., sent a letter to the Federal Housing Finance Agency contesting an analysis released in January. The report, provided to FHFA Acting Director Edward DeMarco in December 2010, was the backbone for why Fannie and Freddie Mac never installed such a program. Reducing principal for a wide-range of underwater borrowers back into positive equity would have cost the GSEs roughly $100 billion, according to the report.

But in their letter, Cummings and Tierney, cite an unnamed Fannie Mae official who said such a pilot principal reduction program was developed and tentatively approved before the report was given to DeMarco.

However, Fannie officials killed the program several months before the November elections that year.

“The program was terminated by senior officials at Fannie Mae who were ‘philosophically opposed’ to the concept of reducing principal,” the congressmen wrote to DeMarco. “The former employee also indicated that significant research had been conducted prior to initiating this pilot program, and that personnel from your office were directly involved in reviewing the program.”

Both Fannie and Freddie owe a combined $151 billion in bailouts to the Treasury Department.

Cummings and Tierney went on to challenge the conclusions in the report. They claimed such a principal reduction program would have saved $28 billion compared to the losses were to be taken if no modifications were conducted.

The FHFA concluded that the $100 billion price tag of implementing such a program would have only brought more losses to taxpayers, considering 80% of underwater borrowers with GSE loans are still current.

“FHFA stands by its analysis of principal forgiveness. We will soon respond to the congressmen’s letter,” an agency spokesperson said.

Fannie declined to comment. In the past, Fannie Mae and Freddie Mac resisted calls for principal reduction.

Roughly 11 million borrowers owe more on their mortgage than their home is worth, preventing them from modifications, short sales, more traditional sales and most programs for refinancing. Of these, roughly 4 million hold home loans backed by Fannie and Freddie.

The Treasury Department said in January it would pay investors, including the GSEs, triple for each dollar of principal allowed to be written off through the Home Affordable Modification Program. The FHFA is considering the offer.

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