Fannie Mae pressured for foreclosures

Aug 27 2011 - 5:19pm


Sacramento Bee
Sacramento Bee

DETROIT -- In early December, a senior executive at Fannie Mae assured members of the Senate Banking Committee in Washington that the mortgage giant was doing everything possible to address the foreclosure crisis.

"Preventing foreclosures is a top priority for Fannie Mae," Terence Edwards, an executive vice president, told the panel. "Foreclosures hurt families and destabilize communities."

But confidential documents obtained by the Detroit Free Press show that Fannie Mae has pushed an agenda at odds with those public assurances.

The records cover Fannie Mae's foreclosure decisions on more than 2,300 properties, a snapshot from among the millions of mortgages Fannie handles nationally. The documents show Fannie Mae has told banks to foreclose on some delinquent homeowners -- those more than a year behind -- even as the banks were trying to help borrowers save their houses, a violation of Fannie's own policy.

Fannie Mae has publicly maintained that homeowners would not lose their houses while negotiating changes to mortgages under the federal Home Affordable Modification Program.

The Detroit Free Press also obtained records revealing that the taxpayer-supported mortgage giant has told banks that it expected them to sell off a fixed percentage of foreclosed homes. In one letter sent to banks around the country last year, a Fannie vice president made clear that Fannie expected 10 percent-12 percent of homes in foreclosure to proceed to sale.

Taken together, the documents offer an unprecedented window into how Fannie decides whether to allow borrowers to exhaust all options to keep their homes.

"It's scary. It really is," said Leisa Fenton of Clarkston, Mich., who is among an untold number of people whose homes were sold in foreclosure even though they had been assured their homes were safe while they sought mortgage relief from Washington.

Her family's home was sold at auction in October. "We just keep praying the Lord is going to work it out," she said.

Alan White, a law professor at Valparaiso University in Valparaiso, Ind., and a leading national expert on the foreclosure crisis, reviewed the records for the Detroit Free Press and said they show Fannie Mae -- which is regulated by the Federal Housing Finance Agency -- is sabotaging the nation's foreclosure prevention efforts and helping drive down home values.

"Fannie just wants to clean up its balance sheet and get these loans off the books while taxpayers are eating these losses," White said, referring to the multibillion-dollar federal bailout of Fannie Mae in 2008.

"And Treasury and the FHFA are letting them get away with it. It's a huge waste. Wealth is being destroyed, people are losing houses needlessly, and taxpayers are losing money."

Fannie Mae officials declined to be interviewed and would not address the issues raised in the records obtained by the Free Press, including a lengthy series of questions provided by email.

But a former Fannie Mae executive, Javid Jaberi, whose name is on some of the documents, said the internal records merely reflect an effort by Fannie Mae to get banks to respond more quickly when loans are delinquent, even if that means pushing some foreclosed homes to sale.

In an interview last Wednesday, Jaberi said there is plenty of blame to go around. Borrowers often didn't understand their options. Banks weren't doing enough to help borrowers to get mortgage relief. And HAMP's documentation rules, he said, were too complex.

"Everyone is to blame," Jaberi said, including Fannie Mae.

Fannie spokesman Andrew Wilson said in a statement Fannie is "committed to preventing foreclosures whenever possible. "We encourage homeowners to reach out as early as possible -- to pursue modifications and other foreclosure prevention solutions."

Various lenders -- Bank of America, GMAC Mortgage, CitiMortgage and Chase -- would not discuss Fannie's policies.

Fannie Mae and many of the nation's top banks have faced considerable criticism for doing little to stem foreclosure sales, which grew by 1.6 million last year.

Investigations by other news media outlets showed that Fannie Mae (and the banks that directly service home loans) help only a sliver of people promised relief, and often delay or bungle applications for modifications. Other reports showed Fannie has punished banks that were too slow to foreclose.

The documents obtained by the Free Press indicate, for the first time, that Fannie wasn't simply indifferent to helping homeowners, but launched a concerted effort to force seriously delinquent borrowers from their homes.

Fannie's foreclosure policy -- what an August 2010 document calls "our new delay initiative" -- focused on homeowners more than 12 months late on their mortgages, including people actively negotiating loan modifications. That stance conflicts with the government's (and Fannie's) rules, which are meant to insulate people while they seek loan relief under HAMP.

Mortgage companies, of course, can't wait forever for delinquent borrowers to catch up on their payments.

But critics argue that Fannie Mae's confidential foreclosure policy is not only at odds with its public assurances, but adds to the inventory of vacant homes across the nation and lowers property values for everyone.

According to White, the Valparaiso professor, foreclosing on a home typically costs Fannie Mae far more than a successful loan modification. But, he and others say, Fannie is willing to absorb higher losses because it knows taxpayers -- not Fannie Mae -- will eventually reimburse the loss.

Since 2008, when the government took over Fannie Mae and its sister company, Freddie Mac, the mortgage giants have cost taxpayers $141 billion, with estimates that the bill could eventually reach as high as $389 billion.

Fannie Mae and Freddie Mac are significant players in the foreclosure crisis; they own or guarantee more than half of all existing single-family mortgages and about two-thirds of all new U.S. home mortgages. Fannie also administers the U.S. Treasury Department's $29.9 billion foreclosure prevention initiative -- Making Home Affordable, which includes HAMP -- that was launched by President Barack Obama in 2009.

Fannie Mae, originally the Federal National Mortgage Association, doesn't lend directly to homeowners. It buys loans from banks, guarantees them and then relies on the banks to service the loans directly. Fannie funds its mortgage investments by issuing debt securities in domestic and international capital markets.

Fannie Mae, according to rules outlined on its website, has told banks that service its loans that they "should not proceed with a foreclosure sale" until a borrower has been evaluated for a loan modification under HAMP. That squares with HAMP's written rules, which forbid banks from completing foreclosures without first weighing a person's eligibility for a modification.

According to RealtyTrac, which tracks U.S. foreclosures, 1.6 million homes were sold in foreclosure last year. It's unclear from the records how many could have kept their homes had Fannie not enacted its confidential foreclosure policy.

The confidential records reviewed by the Free Press include notations on more than 2,300 homes in which banks asked Fannie to delay foreclosure sales while homeowners sought modifications or other relief, including short sales -- in which a lender lets the borrower sell a home for less than what is owed.

Meg Burns, chief of policy at FHFA, which oversees Fannie Mae, said foreclosure sales are delayed "all the time. We suspend foreclosure processing all the time. ... There are plenty of postponements."

Burns said if anyone is to blame for home losses, it's the banks for not dealing sooner with homeowners.

FHFA officials also noted that Fannie and Freddie are adopting new rules in October that provide incentives and penalties to encourage servicers to work with delinquent borrowers at an early stage.

Edward DeMarco, FHFA's acting director, has said the new policies should give homeowners a greater understanding of the process and minimize taxpayer losses by ensuring loans are serviced efficiently and fairly.

FHFA also noted that since Fannie and Freddie were taken into conservatorship, they have completed more than 900,000 loan modifications.

White, the Valparaiso professor, said Fannie's decision to target homeowners who are more than a year delinquent doesn't allow for changes in some people's financial situations, such as a new job or higher pay.

He is among a bipartisan collection of critics who say Fannie is less concerned with helping homeowners than in pushing the cost of troubled mortgages to taxpayers.

For example, White said, if a home with a $200,000 mortgage is foreclosed and Fannie nets $80,000 from its sale, Fannie loses $120,000.

But because Congress authorized the Treasury Department to reimburse Fannie as part of the government's takeover, taxpayers eat the losses.

"Fannie would rather foreclose all the bad and marginal mortgages now, even at very high loss rates, while losses are on the taxpayer, so that when it is once again a private company, these risky mortgages will be gone, and will not result in losses for its shareholders," he said.

"Treasury and Congress have given Fannie a blank check, but Fannie knows the checkbook will be taken away sooner or later."

Fannie Mae has made it difficult in other ways for borrowers to keep their homes.

Take the case of a woman represented by lawyer Lorray Brown of the Michigan Poverty Law Program.

The Eaton County, Mich., woman lost her home in foreclosure and was facing eviction when she persuaded a bank to lend her $170,000 to buy the property back from Fannie Mae. Brown said Fannie initially rejected her client's offer, insisting on the full $184,000 the woman owed -- $14,000 more than the woman could raise.

Fannie did not accept the woman's offer until January, after months of wrangling.

Had Fannie Mae won the fight, it would certainly have spent more than $14,000 on legal fees and foreclosures costs while displacing a family and leaving another home vacant.

Fannie lawyers referred questions to headquarters, which declined to comment.

Well before Edwards, the Fannie Mae executive, testified before the Senate committee that the mortgage giant was doing all it could to prevent foreclosures, Fannie Mae was making plans to punish banks that were not selling foreclosed homes quickly enough, records show.

The records obtained by the Free Press buttress documents reported by the Washington Post earlier this year.

"Fannie Mae is suffering delays in the processing of its foreclosures," according to one unsigned memo from Aug. 31, 2010.

The memo, a "talking points" summary for Fannie Mae management, outlined its plans to fine banks for delaying foreclosure on seriously delinquent homeowners.

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