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Posted at 12:27 PM ET, 12/ 1/2010

Fannie, Freddie say mortgage servicers triggered foreclosure crisis

By Zachary A. Goldfarb

Fannie Mae and Freddie Mac defended their role in the foreclosure crisis in prepared testimony to Congress on Wednesday, while at least one federal regulator said the mortgage giants had contributed to the problem.

Speaking to the Senate Banking Committee at a hearing on the national foreclosure debacle, Fannie and Freddie executives emphasized that they are not responsible for managing payments by borrowers on home loans or foreclosing on homeowners when they default.

These tasks, executives say, are the responsibility of mortgage servicers and law firms with which the companies contract.

"I want to underscore that Fannie Mae does not service loans. We rely on the loan servicing divisions of major banks and other financial institutions as the primary front-line operators and points of contact with the borrowers," said Terence Edwards, executive vice president for credit portfolio management at Fannie Mae. "We pay servicers significant fees during the life of a loan to work with borrowers. Servicers are required under our servicing contracts to help borrowers in trouble, not just collect payments."

Donald Bisenius, executive vice president of the single family credit guarantee business at Freddie Mac, made the same point. "Freddie Mac provides guidelines for the origination and servicing of our loans, and contracts with sellers and servicers to carry out these operations."

At the same time, a senior federal regulator, acting Comptroller of the Currency John Walsh, said Fannie and Freddie's policies have contributed to the foreclosure mess.

The companies "require servicers to use law firms approved for particular geographies when preparing foreclosure filings," he said. "For large mortgage servicers that operate nationwide, this often has resulted in use of a significant number of third parties - lawyers and other service providers - and a panoply of documents used in their mortgage foreclosure processes: one large mortgage servicer has indicated that they use over 250 different affidavit forms."

Walsh acknowledged that the six large national bank servicers - Bank of America, Citibank, J.P. Morgan Chase, HSBC, PNC, Wells Fargo and U.S. Bank - have deficiencies in their foreclosure processes. He said the OCC and other banking regulators are conducting in-depth exams of these processes.

Edwards of Fannie Mae defended the attorney network and said it was expanding to all 50 states. "Having the retained attorney network allows us to improve our oversight and management of both the servicers and the attorneys' actions during the default process," he said. "The network provides the framework to hold the attorneys accountable for their performance while giving us the authority to provide guidance to the firms, implement new policies and cost-saving structures, and audit actions by the firms."

Meanwhile, Bisenius defended the dual-track approach to mortgage modification and foreclosure embraced by many of its servicers: Attempt to modify a loan to make it more affordable, but also prepare to foreclose if that is not possible.

"While we believe that borrowers who already are under significant stress arising from their financial situations should not be subjected to needless confusion, we also believe that unnecessary delays in an already lengthy foreclosure process would be ounterproductive," Bisenius said.

He noted that foreclosures usually last well over a year, and sometimes close to two. "The dual-track process allows for a delicate balance between the need to minimize losses and protect communities while protecting borrower interests. Lengthy foreclosure delays impose substantial losses on Freddie Mac and taxpayers - by some estimates, $30 to 40 per day and $10,000 to $15,000 per year for every defaulted loan," Bisenius said. "These costs do not include additional losses resulting from depreciation in the value of the property."

By Zachary A. Goldfarb  | December 1, 2010; 12:27 PM ET
Categories:  Housing  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Economic agenda: Wednesday, Dec. 1, 2010
Next: Economic agenda: Thursday, Dec. 2, 2010


3% down payment on a loan is a joke. Pretty darn easy to walk away from the loan, especially when the house is way overvalued to begin with. Set some real standards.

Posted by: RobMc1 | December 1, 2010 5:33 PM | Report abuse

In their haste to package and sell bundles of mortgages systems were set up to process assignment paperwork and to avoid the cumbersome and expensive procedural requirements of recording assignment and other transfer documents. Trusts and other conglomeration techniques were used but the lenders and securitization firms lost sight of the fact that if a loan was to be foreclosed statutory requirements were strictly applied by the trial courts involved. Some states more so than others. Fannie Mae and Freddie Mac are now pointing the fingers at originators and servicers. This will not be an effective strategy in that you cannot transfer the obligation of the principal to the agent. It seems to be the intention of regulators and congress to now focus on the paperwork rather than the policies and processes at the two major GSE's.

There is a paper trail a mile long available to regulators, investigators and congress. Which loans failed and the paperwork supporting those loans is a matter of record. Loan applications and supporting documents including income and appraisal information are all available for inspection. A representative sample of non performing loans should be carefully examined to identify patterns of fraud and abuse by borrower, originator, underwriter, appraiser, broker and all involved in the transaction. My thought is that patterns will emerge and characteristics of failed loans will be readily identifiable. This is only one half of the process.

The policies and procedures within Fannie and Freddie changed over time. Also, housing stock was overdeveloped due to easy money and tax free take outs by developer borrowers. A thorough post mortem going back to 1996 through 2010 will provide a tremendous amount of information. The overlays of policy and loan processing will provide answers for the purpose of reforming policies and instituting protections going forward.

The resulting CDO's and the CDS's that were created to hedge and bet against performance of these hybridized bundles of loans would not have been possible without the volume of loans created in such a short period of time. An honest post mortem is required, there are already rumblings that new loans will be written as if we never learned a single lesson from this disaster. If these new loans, no better than there predecessors, find their way back to questionable financial products and the resulting hedges against performance reemerge we have learned nothing. The cash flow will not be available to make good. Haven't we seen this movie already?

Posted by: JimDandy21 | December 1, 2010 8:07 PM | Report abuse

As I watched the Senate Hearing, I clearly saw that Fannie and Freddie are run by either outright incompetents, or egotistical children. They admitted they don't talk to each other and don't seem to want to. All their behavioral issues aside, neither agency was interested in seeing the problem from the homeowner's angle. Both took the 'deadbeat' meme. Terence Edwards, executive vice president for credit portfolio management at Fannie Mae, said in his opening speech that Fannie Has a one track foreclosure process. But, Freddie Mac Executive Vice President Donald Bisenius said the so called dual track process is okay, and Ed DeMarco, citing FHFA director, backed hem as well. Don't they get that two-track is more stressful for the homeowner, or do they even care. Afterward, Walsh, whom Maxine Waters shredded, finally put out a request to banks that they not to two-track if there's a mod on the table. Our worthless government, giving trillions to business while letting people's lives sink.

Posted by: kravitzkravitz | December 1, 2010 8:49 PM | Report abuse

When these same fools at FNMA and FHLMC were creating what appeared to be enormous profits while putting the taxpayers and our entire economy at risk, they were patting themselves on the backs and paying themselves obscene bonuses. The GSEs are bloated with self-important incompetents and WORSE.

The Administration needs to do a wholesale housecleaning and then both of these agencies need to be completely DISMANTLED.

Posted by: William A. Roper, Jr. | December 2, 2010 12:43 AM | Report abuse

We submitted a request for a mortgage quote and received 3 great offers at "123 Mortgage Refinance". Thank you for helping us lower our house payment with 3.14% mortgage refinance rate. Highly recommend and best place for mortgage refinance.

Posted by: irmajarrell | December 2, 2010 12:46 AM | Report abuse

Fannie and Freddie were transformed through Congressional pressure into affirmative action oriented corporations charged with increasing home ownership by minorities.

Their incompetent chief executives were quite willing to sacrifice the stability, and even survival, of the companies in pursuit of that goal, while lining their own pockets with hundreds of millions of dollars in pay. (They should be forced to disgorge their earnings.) The results were inevitable.

Posted by: nerih | December 2, 2010 6:08 AM | Report abuse

Request for Congressional Foreclosure Panel to Examine Foreclosure Lawyers

Lawyers are officers of the court knowledge of applicable laws and civil procedure is not required from mortgage lenders, nor loan servicers. In states that require judicial foreclosures, FORECLOSURE LAWYERS are the ones who file lawsuits to seize and sell property; and lawyers are responsible for filing and recording foreclosure property deeds. . .

Sham foreclosure auctions, property never becomes acquired by lenders; but 'straw buyers'

Posted by: lawgrace | December 2, 2010 1:25 PM | Report abuse

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