Fannie Mae Pushing Foreclosures

Fannie Mae has systematically refused mortgage servicer requests to postpone foreclosures for viable modifications, according to an investigation by The Detroit Free Press.  Because servicers usually recommend modifications only when they will maximize net present value, i.e. make economic sense, Fannie Mae's policy is resulting in unneccesarily higher foreclosure losses, losses which for now are being absorbed by taxpayer subsidies.  To be clear, this is not a matter of Fannie Mae economists disagreeing with the servicers' evaluation of whether a homeowner can successfully pay a modified loan.  The policy appears to be simple-minded in the extreme - no postponements if the mortgage has been in default for more than 12 months.  Never mind that another foreclosure sale in the current market will result in losses averaging 60% or or more of the loan balance, or that an unemployed homeowner may have found a new job that will permit full repayment of the loan.

Why would Fannie adopt such a ridiculous anti-workout policy in the midst of a massive foreclosure crisis?  My inference is that current management is indifferent to foreclosure losses while they are being absorbed by the Treasury, and more concerned about getting non-paying mortgages off Fannie's books regardless of the cost.  By doing so, they can slim down the mortgage portfolio so that, in the event Fannie gets to be a private company again, those pesky troubled mortgages will be gone.

What this also reveals to my mind is a complete failure of oversight by Treasury and Fannie's regulator and "conservator", F.H.F.A.  It also reflects the Administration's policy drift about the future of the GSEs.  The proper role for Fannie and Freddie should be either 1) a government funder of last resort, analagous to F.H.A.'s role as insurer of last resort, or 2) a public utility, providing safe dividends to shareholders in return for providing low-cost capital to serve only the mortgage market that can't be funded by private capital.  What should not happen is to return Fannie and Freddie to a growth company model in which they leverage their explicit or implicit subsidy to engage in mortgage capital arbitrage.  If current management is still imagining that they will some day return Fannie Mae to the go-go days of pre-2007, then Fannie Mae needs new management. 

Comments

[Richard Davet]

My recent question to FHFA's general counsel:

Dear Mr. Pollard:

I am sure that you saw the recent announcement pertaining to fnma’s purchase of “servicing rights” from BAC.

http://www.dsnews.com/articles/bofa-sells-pool-of-servicing-rights-to-fannie-mae-2011-08-11

Recently, fnma filed an amicus brief in the ohio supreme court wherein they cite their statutory purpose. I trying to determine the authority for such a purchase. As the general counsel can you itemize the statutory authority for the purchase from BAC?

Statutory purposes of Fannie Mae:
The Congress hereby declares that the purposes of this title are to establish
secondary market facilities for residential mortgages, to provide that the
operations thereof shall be financed by private capital to the maximum extent
feasible, and to authorize such facilities to--
(1) provide stability in the secondary market for residential
mortgages;
(2) respond appropriately to the private capital market;
(3) provide ongoing assistance to the secondary market for residential
mortgages (including activities relating to mortgages on housing
9
for low- and moderate-income families involving a reasonable
economic return that may be less than the return eamed on other
activities) by increasing the liquidity of mortgage investments and
improving the distribution of investment capital available for
residential mortgage financing;
(4) promote access to mortgage credit throughout the Nation
(including central cities, rural areas, and underserved areas) by
increasing the liquidity of mortgage investments and improving the
distribution of investment capital available for residential mortgage
financing; and
+ + *
Section 1716, Title 12, U.S. Code.
Statutory

[Auden L. Grumet, Esq.]

"I AM trying to determine..."!

[church financing]

I agree. they are just trying to dump the problem on the tax payers.