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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.

Geithner pointed out that DeMarco's own data showed that the program would help nearly half a million homeowners and save taxpayers as much as $1 billion.

The housing regulator responded saying that figure only applied to a group of homeowners that had not made a mortgage payment in a year and would assume all those borrowers would win a mortgage write-down -- a scenario deemed unlikely.

Rather, DeMarco's analysis showed that the projected net benefit to taxpayers would be $500 million in the best case scenario and its experience has shown that the likelihood of successfully modifying mortgages was small.