Fannie, Freddie say mortgage servicers triggered foreclosure crisis
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."
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