The idea had begun to attract attention across the country, as well as on Capitol Hill.
When he testified before the House Financial Services Committee in July, Treasury Secretary Timothy Geithner said his department was "carefully looking" at the proposal when asked about it by Rep. Gregory Meeks (D-N.Y.).
However, he cautioned that the idea "raises a lot of complicated legal and policy questions," and added that states have a "broad range of other tools" available to assist struggling homeowners.
The move had earned the ire of the financial sector, which was buoyed by the concerns aired by the FHFA.
"Such actions would have a wide variety of negative impacts on the fragile housing recovery and in particular on the consumers in the jurisdictions that employed such a method," said John Dalton, president of the Housing Policy Council for the Financial Services Roundtable. "It would ultimately make it harder for deserving consumers to obtain credit."
The Securities Industry and Financial Markets Association warned regulators in July that they believed such an approach would be unconstitutional and would have "devastating consequences" to the private housing market.
The FHFA's notice came just days after its acting director, Edward DeMarco, announced the regulator would not permit a plan pushed by congressional Democrats and the White House that would write down the principal on mortgages for struggling homeowners.
DeMarco said the proposal, which had been a high priority for many Democrats, yielded too small a benefit and posed "unknown costs and risks."