Massachusetts tells Fannie, Freddie to follow new mortgage law

The letter from the state's attorney general Martha Coakley to Ed DeMarco, the director of the regulator of the two companies, raises the stakes in a simmering feud 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 the head of the Federal Housing Finance Agency.

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.

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.

The Federal Housing Finance Agency did not immediately respond to a request for comment.

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