Fannie Mae and Freddie Mac Failed to Pursue Deficiencies
The government-sponsored enterprises are leaving billions on the table by not going after deadbeat borrowers who may have the wherewithal to make good on their mortgages but failed to do so.
Freddie Mac is the biggest culprit, according to a scathing report from the Federal Housing Finance Agency's Office of the Inspector General, which found that the company missed out on collecting as much as $4.6 billion in deficiency judgments from borrowers who might have had the ability to pay but didn't.
In a separate but also stinging report, the OIG said Fannie Mae, too, is failing to go after deficiencies. The report did not put a dollar figure on the amount of money the company is losing by not being more vigorous, but it did say its vendors failed to chase down nearly 45,000 borrowers within the period allotted by state laws.
The reports are a follow-up to one issued a year ago that found that the FHFA, the agency which oversees the two GSEs, had unfulfilled opportunity to provide the enterprises with guidance about effectively pursuing and collecting deficiencies from borrowers who possess the ability to repay.
The new reports provide more detail on how some borrowers are being allowed to skate.
In the Freddie report, the OIG found that the company neglected to refer nearly 58,000 foreclosures worth some $4.6 billion to vendors for recovery.
Not all those borrowers would have had the ability to make up the shortfall between what they owed and what Freddie Mac eventually sold the house for, so there's no way of knowing how much actually would have been collected, the report admits. But it says Freddie Mac "eliminated any possibility of recovery" when it simply did not refer the bad loans for a third-party vendor to find out if the deficiency was collectable.
Fannie Mae does a better job in that regard, and with some success, too, according to the OIG. But in the second report, the company was slapped on the wrist because its vendors "unnecessarily limited their pursuit" of possible deadbeats, largely because they decided there wasn't enough time to evaluate them before statute of limitation laws kicked in in their respective states.
All this conjecture matters, the OIG pointed out, because pursuing deficiencies can mitigate at least some credit losses and serve as a deterrent to current and future borrowers who might be thinking about pulling the plug on their own mortgages and strategically defaulting.
Freddie Mac was chastised largely because it "employed inadequate policies" that failed to maximize referrals to vendors, or ensure the prioritization, coordination and monitoring of deficiency collection activity among servicers, attorneys and collection agents. The 58,000 foreclosures mentioned above did not include 7,000 or so more foreclosures that were not even referred because they occurred in states where Freddie Mac's largest collection vendor had negligible results.
Fannie Mae has better controls in place, but it, too, was deficient in collecting deficiency judgments because it allowed its vendors to move too slowly. The company should strengthen its efforts by more fully considering statute of limitations' timeframes.
As it was, in the 30-month period between January 2010 and June 2012, Fannie Mae's vendors excluded from pursuit or ceased action in more than 44,650 foreclosure sales because the statute of limitations was about to expire or already had run out.
In ten states, deficiency judgments are not allowed after a short window, ranging from 30 to 180 days. And vendors take this into account when deciding whether to run down scofflaws. But the OIG said the process and coordination between vendors could improve their chances of collecting what's owed, especially in those 10 states.
Lew Sichelman is an independent journalist who has been covering the housing and mortgage markets for more than 40 years.