Yesterday Federal Housing Finance Agency head Ed DeMarco rejected a program that would allow principal reduction for underwater homeowners.

The program would have been backed by a Treasury subsidy for every dollar of loan reduction.

Tim Geithner is asking him to reconsider, and Paul Krugman is calling for DeMarco's head.

Here's why they're upset: this was a program that would have saved Fannie Mae and Freddie Mac $3.6 billion dollars versus other loan modification programs, according to the FHFA's own numbers.

More importantly, it would have significantly aided some of the American families most affected by the crisis. In the FHFA's most favorable scenario, 497,000 underwater homeowners could be eligible for loan modification, and taxpayers would save around $1 billion dollars.

They also take issue with a glaring omission in DeMarco's reasons for rejection; he did not account for the program's benefit to the economy.

Dylan Matthews argues that principle reduction would have the same financial and economic effect as a tax cut. It would be a particularly effective tax cut as well, since it is targeted at low income families under significant financial pressure, who are likely to spend it rapidly.

Furthermore, studies show that principal reduction isn't just theoretically a nice thing, but actually works.

Determining the economic benefit of the program is not DeMarco's job. Neither is deciding the benefit to taxpayers.

DeMarco argued, in his letter rejecting the program, that should 3000 additional homeowners stop payment seeking loan modification, the program could have a net cost to taxpayers. That's a fair point. However, any taxpayer loss would have gone directly to families in need. That was the point of the program in the first place.

President Obama attempted to replace DeMarco in 2010, but was blocked by Congressional Republicans. Seeing as he just spiked one of the President's few options to aid the economy without Congressional aid, his appointment and the failure to replace him have come at significant cost.

Don't Miss: 16 Cities Getting Destroyed By Foreclosures >

