Nov 3 (Reuters) - The California attorney general on Thursday called on Fannie Mae and Freddie Mac to cut mortgage debt on the loans they own, a suggestion they have long resisted.

"It has become clear to me that the only way to keep distressed California homeowners in their homes is through meaningful principal reduction," attorney general Kamala Harris said in a statement.

Harris faces pressure to extract a better deal for California homeowners in long-running multi-state talks to settle mortgage abuses by top banks.

The majority of the estimated 11 million mortgages that are underwater in the United States are owned by Fannie and Freddie, which the proposed settlement is not expected to include.

Harris said the regulator of Fannie and Freddie, Edward DeMarco, should step down if he is unwilling to support principal reduction on the underwater mortgages they own.

DeMarco, acting director of the Federal Housing Finance Agency, which oversees the two firms, has argued that doing so would reduce the value of taxpayer assets.

DeMarco told lawmakers at a House of Representatives financial services subcommittee hearing on Thursday that Congress must change the law if it wants to use taxpayer funds to reduce principal mortgage debt.

The two companies have been propped up with about $145 billion in taxpayer support since they were seized by the government and placed into conservatorship in September 2008.

State and federal officials are close to signing a $25 billion settlement with five banks to resolve allegations of improper foreclosures and other misconduct.

Harris withdrew from those talks in September and said the proposed deal failed to provide enough relief for her state's homeowners and released the banks from too many claims.

It had included about $15 billion in principal reduction and other loan modifications for distressed borrowers, but only applies to loans not owned by Fannie or Freddie.

Since then, negotiators have added a $2 billion to $5 billion plan to allow underwater borrowers who are current on their payments to refinance. The addition applies only to loans held by the banks.

In exchange, the states have agreed to release the banks -- Bank of America Corp, JPMorgan Chase & Co, Wells Fargo, Citigroup, and Ally Financial -- from claims that they made legal errors when first originating the loans.

(Reporting by Aruna Viswanatha and Margaret Chadbourn)

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