The Real Estate Bloggers

Fannie Mae and Freddie Mac Stop Debt Reductions

Posted: 08 Oct 2011 08:17 AM PDT

Remember when they said centralized lending was the best thing for the American homeowner?

Well, let’s be honest, Freddie Mac and Fannie Mae are probably one of the biggest impediments of the housing recovery now. Instead of loans being controlled by a local or state bank that would have a better understanding the of the issues of the community, our government lending institutions are locked into a rigid template that denies any flexibility.

Case in point, Arizona created a program to help homeowners seriously underwater. For a state that has seen property values drop by over 50% in some areas, this is a noble effort and may help the overall market. Instead Freddie and Fannie get in the way.

Only three homeowners have been approved for debt reduction since the program began in September 2010. A major obstacle has been that the two largest mortgage guarantors, Fannie Mae and Freddie Mac, will not participate — in Arizona or elsewhere. No loans are eligible for the state’s program 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 believe is an indispensable tool for fixing the housing problem.

Think of how the local credit union or bank would react. They know housing prices have tanked and have already adjusted their books to take this into consideration. To keep people in their homes and avoid costly foreclosures these banks would have made adjustments to those they felt would fulfill their agreements.

Instead we have Federal bureaucrats demanding an all or nothing strategy while funneling money to the lobbyist’s groups that are exasperating the problems.

Welcome to the Atlas Shrugged model of Lose-Lose.

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Fannie Mae and Freddie Mac Stop Debt Reductions