Regulator says no to Obama mortgage write-down plan

WASHINGTON (Reuters) - The top housing regulator rebuffed a plan by the Obama administration to cut mortgages held by struggling homeowners, a blow to the White House, which is keen to show voters it can help fix the housing market.

The regulator for government-run housing finance giants Fannie Mae and Freddie Mac said on Tuesday that using taxpayer-funded bank bailout money could encourage defaults and not make a big improvement in reducing foreclosures in a cost-effective way for taxpayers.

"The anticipated benefits do not outweigh the costs and risks," said the Federal Housing Finance Agency's head Edward DeMarco, who has come under intense pressure from the government to agree to the plan.

The regulator's decision drew an immediate rebuke from the Obama administration and Democratic lawmakers. Treasury Secretary Timothy Geithner disputed the agency's conclusions and urged DeMarco to reconsider his decision.

The housing market started deteriorating in 2006 and wiped out trillions of dollars in equity. Although the market has shown signs of recovery, about 11 million homeowners owe more than their properties are worth and the Obama administration has struggled with various taxpayer-funded programs to keep people in their homes.

"I do not believe it is the best decision for the country," Geithner told DeMarco in a letter released to the media.

The use of targeted principal reduction would "provide much needed help to a significant number of troubled homeowners, help repair the nation's housing market and result in a net benefit to taxpayers," Geithner said.

Despite several plans to tackle the country's housing problems, most of which is focused on giving homeowners the opportunity to refinance at lower interest rates, the administration has yet to come up with a plan to stabilize the market.

Obama, a Democrat, is trying to convince voters ahead of the November presidential election that his policies have helped the economy recover from dire days of the financial crisis and ensuing recession. His Republican challenger, Mitt Romney, has said the foreclosure process should be allowed to run its course and hit the bottom.