Republicans and Democrats are squabbling about what to do with Fannie and Freddie.
Republicans want to wind them down quicker. Democrats want a big government role in the mortgage market.
Fannie and Freddie don’t want to write down loan principal and this is interfering with various government plans to reduce mortgage foreclosures by subsidizing lenders who write down mortgage principle.
This is ironic because Fannie and Freddie exist to subsidize the mortgage market. They are an arm of the government. But when the government controls much of the economy, then various branches of the government work at cross purposes.
A major obstacle has been that the two largest mortgage guarantors, Fannie Mae and Freddie Mac, will not participate. No loans are eligible if they were bought and held or securitized by the two companies, which are now under government control and guarantee more than 70 percent of the country’s home loans.
“It is extremely difficult for the principal reduction program to be successful” when Fannie and Freddie opt out, said Shaun Rieve, a spokesman for the Arizona Department of Housing.
The companies’ policy against debt forgiveness, or principal reduction, has blocked widespread use of what many have come to believe is an indispensable tool for fixing the housing problem. The state attorneys general have been insisting that debt forgiveness be a part of the multibillion-dollar settlement they are negotiating with big banks over faulty mortgage practices.