Mortgage policy analysts hold conflicting expectations for principal reduction on Fannie Mae and Freddie Mac loans following the release of preliminary analysis from their regulator Tuesday.

The early results from the study show increased incentives from the Treasury Department would save the GSEs roughly $1.7 billion if principal reduction is adopted under the Home Affordable Modification Program.

But Federal Housing Finance Agency Edward DeMarco's support for the idea ended there. The analysis showed a $2.1 billion cost to the taxpayer for the incentives, and only a small percentage of underwater borrowers in the U.S. would benefit — at most 700,000 of the 11 million in negative equity.

Analysts at Bank of America (BAC) drew from DeMarco's repeated concerns about moral hazard that principal write-downs would be too risky for the GSEs. Notably, it would take only very few current borrowers strategically defaulting to offset the benefits.

"He expressed specific concern about keeping the remaining borrowers current on their mortgages, most of whom have always been current. He clearly expressed concern about incentivizing these borrowers to claim hardship or go delinquent on their mortgage," BofA analysts said. "We conclude from his preliminary remarks on the incentive approach to principal forgiveness of GSE loans that there will be zero to minimal scale of such an approach."

Conversely, analysts at investment bank Keefe, Bruyette & Woods said there was enough in the remarks to conclude write-downs, however limited, was a real possibility.

"We think a change in policy to allow more principal reductions is coming but expect it will be announced later in the month," according to KBW.

Jaret Seiberg, senior policy analyst at Guggenheim in Washington said DeMarco outlined too many hurdles for it to work. DeMarco repeatedly praised forbearance and likened it to the shared appreciation model some servicers are using but without the technology upgrades needed for principal reduction.

"Post this speech, we believe it will be difficult to adopt a significant principal reduction program," Seiberg said.

There remains pressure from the industry to avoid the unintended consequences of adopting such a program.

"Recovery in the housing market is extremely important, yet there are more cost-effective and efficient options other than principal reductions for borrowers and American taxpayers," according to a statement from the Amerian Bankers Association. "In most instances, principal reductions through Fannie Mae and Freddie Mac are not a feasible solution because they increase — rather than limit — taxpayers' liability, raise the cost of credit and create improper incentives for borrowers."

Issac Boltansky, an analyst at Compass Point, said it was more likely DeMarco would adopt principal reduction under HAMP but crackdown on borrower eligibility rather than refusing to allow the GSEs to participate at all.

"Our conversations with contacts lead us to believe that his speech has done little to relieve pressure for him to embrace principal reduction," Boltansky said. "DeMarco is still facing considerable pressure from the White House, Treasury and a formidable block of congressional Democrats. We believe that if he refuses to adopt principal reduction as a means of foreclosure prevention that the likelihood of him being relieved of his position is extremely high."