The Treasury Department has lifted the $400 billion cap on the financial lifelines available to Fannie Mae and Freddie Mac as part of their conservatorship. So far, the two companies have used only $112 billion of the cash set aside for them, but Treasury officials say they will inject as much money “as necessary” into the GSEs over the next three years to ensure the companies maintain a positive net worth.

The administration’s pledge of unlimited support has prompted speculation that the move is intended to cover changes to the Home Affordable Modification Program (HAMP), which could include principal writedowns for troubled borrowers.

Consumer advocacy groups, lawmakers, and several federal watchdog agencies – including the Congressional Oversight Panel and the TARP special inspector general – all have repeatedly criticized the government’s modification program for not addressing the issue of negative equity that plagues so many homeowners today. Many analysts and mortgage experts say principal reduction is a necessary component of the modification equation to ensure struggling borrowers’ don’t redefault on their new loan, particularly for those who are underwater and have little incentive to stay in their homes as they watch property values continue to tumble.

First American CoreLogic says that nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity at the end of the third quarter of 2009. Sam Khater, a senior economist with company, estimated that the average underwater borrower, at that time, owed $69,700 more on their property than it was worth, according to American Banker. Khater told the paper that it would take $745 billion – more than the administration’s controversial $700 billion financial bailout package – merely to extinguish borrowers’ negative equity and give them a 100 percent loan-to-value ratio.

At the time Fannie Mae and Freddie Mac were placed in conservatorship, federal officials also imposed stipulations that would have required the two mortgage giants to begin shrinking their portfolios and mortgage investments beginning this year in order to curb the size and exposure of both.

But that mandate too has now been lifted. The Treasury said it “does not expect Fannie Mae and Freddie Mac to be active buyers to increase the size of their retained mortgage portfolios, but neither is it expected that active selling will be necessary to meet the required targets.”

Mahesh Swaminathan, senior mortgage analyst at Credit Suisse, explained to the Wall Street Journal that the GSEs could use their increased capacity to purchase delinquent loans from pools of mortgage-backed securities that they guarantee. The two companies already purchase defaulted loans as they modify them under HAMP, but the additional breathing room means it is now a “slam-dunk for them to speed up” purchases of delinquent loans, Swaminathan told the Journal.

Mainstream media has accused the Treasury of deliberately timing the announcement of its new plans for the GSEs late on Christmas Eve in order to skirt the eyes of American taxpayers who would be watching family and friends open gifts rather than the goings-on in Washington. The message, though, didn’t escape the attention of lawmakers, who almost immediately called for a congressional investigation into the Treasury’s decision.

Rep. Dennis Kucinich (D-Ohio) said his congressional subcommittee plans to investigate Treasury’s decision to lift Fannie and Freddie’s existing $400 billion fiscal cap, the Journal reported.

Reps. Scott Garrett (R-New Jersey) and Spencer Bachus (R-Alabama) have also issued a joint statement calling on the House Financial Services Committee to convene a hearing to examine the administration’s restructuring of the GSEs’ bailout, as well as the administration’s “transparent attempt to hide the news from the American people” that it had approved “numerous multi-million dollar taxpayer funded bonuses to executives of Fannie Mae and Freddie Mac.”On the same day of the Treasury’s announcement, the GSEs’ regulator, the “Federal Housing Finance Agency (FHFA) disclosed”:http://www.fhfa.gov/webfiles/15332/Exec%20Comp%2012%2024%2009.pdf new compensation and incentive payment plans for the executive teams at both companies.