The Failures of Fannie: Responsibility for the Mortgage Servicing Mess

The news that an Illinois court is halting foreclosures by law firm Fisher and Shapiro LLC will spark another round of frustration about who is responsible for the mess that is the mortgage servicing industry. There is plenty of blame to go around, but I rarely hear mention of the contributions of Fannie Mae and Freddie Mac  to the mortgage servicing industry. 

Fannie and Freddie, whatever one thinks of them in their role as guarantors, are a serious part of the problem in the mortgage servicing world--and they long have been. As an initial matter, consider that Fisher and Shapiro, the Illinois firm that admitted to altering affidavits to add fees, is an approved Fannie Mae firm to foreclose on homeowners in Illinois. You can verify this for yourself on Fannie's publicly available "retained attorney list." Fannie pulled a couple of Florida firms off its list following allegations of misbehavior according to Housing Wire, but this type of "oops, a bad one slid by" reaction from Fannie is exactly part of the problem. It is still treating mortgage servicing as a "bad apple" problem and not a "rotten barrel" problem. Of course, Fannie built the barrel to a large extent through its servicing guidelines, so perhaps Fannie is incapable of rethinking mortgage servicing. 

To my mind, the Fannie and Freddie guidelines are a big part of the fast-at-all-costs attitude of the mortgage servicing world and for the incredible concentration of foreclosure work in a few law firms. These firms were rewarded by Fannie with all or most of the work for a given state because they could meet  Fannie's time and cost guidelines for "appropriate" servicing. But those guidelines themselves are/were often the problem. 

To take a specific example, consider bankruptcy proofs of claim. Years ago, I wrote about the lack of compliance with the bankruptcy rules of procedure in the preparation of claims. I heard from a lot of people concerned about the problem, including some in the industry who wanted to help me understand their challenges or who frankly shared my concerns. Not a peep from Fannie-- ever.  Yet, Fannie's servicing guidelines are a big part of why shoddy practices exist in the bankruptcy world. Fannie will only reimburse $150 for the preparation of a bankruptcy proof of a claim, hardly enough in today's climate for a firm to comply with the legal rules, such as verifying that fees and cost really are pre-petition, calculating the escrow to guard against bankruptcy "double-dipping," and locating the copies of the note and mortgage required by the rule. The result is claims that often skirt the law, or even violate it. There are similar problems with state foreclosure laws and how they interact with the guidelines. 

Fannie announced on February 23, 2011, years after complaints about mortgage servicing became literally front-page NYTimes headlines, that it is launching a servicer accountability program, I do not think we can afford to leave Fannie and Freddie to clean up the servicing mess that they helped spawn. Fannie and Freddie are in control of the government. I hope that a big part of any settlement by the Attorneys General and the federal regulators will be to rework the servicing guidelines, including Fannie and Freddie's "dual-track" guideline that requires mortgage servicers to move ahead with foreclosures even as homeowners are being considered for modifications. 

As I said at the beginning, there is ample blame to go around for the mortgage servicing mess. Lawyers have professional responsibilities to courts, to the profession, and to the public. Fisher and Shapiro, like several other firms, breached those duties. But Fannie hired them, supervised them, and paid them millions of dollars, and the buck should stop at Fannie--our own taxpayer-supported entity--to become part of the solution and stop being part of the problem. 

Comments

[promissory note]

Fannie and Freddie are no doubt bigger problems for many acting as guarantors so they deserve that.

[Oyez]

Fannie and Freddie were also instrumental in developing, and gave wholehearted approval to, the MERS system.

While I appreciate the gist of the post, real reform of Fannie and Freddie will mean prominent politicians are exposed as felons. I'm not holding my breath.

[Richard Davet]

The GSE are the genesis of it all. Uniquely operated by remote control by their various players in the buisiness model, now financed by the taxpayers.

The GSE selected the foreclosure mills who collect money like................Tony Soprano.

[Constant Diligence]

Let's Hold them accountable one American Home Loan at a time.

We must all continue to fight for what is left of the American Middle-class Homeowner's rights before they are all gone!

http://diligencegroupllc.net/

American Middle-class Homeowner

-AMH

[losing my home in florida]

the sag continues in floridah. the lawyer wells fargo has reffered my loan to has only 10 months in the floridah bar. lets get the younins in on the fraud they dont know anything nice. my lawyer looked it up. what a horrible situation for this girl. all she wants to do is work and now they put her in the foreclosure dept. how sick praying on a young giirl fresh out law school, who never has even owned a home. that is just not right you go wells fargo

[Sara Lipowitz]

I think the reason we don't hear so much about Fannie/Freddie's role is that they didn't invent the whole crooked game. They learned to play it after it had been ongoing for a number of years, and then they played on a wide scale.

The problem with Fannie/Freddie was their quasi-governmental role. I remember back in 2003-2003 listening to pieces on Marketplace about how Fannie/Freddie was a publicly traded company but implicitly backed by the government, such that everyone pretty much knew in dealing with Fannie/Freddie that if anything went wrong, there would be a taxpayer bailout. I remember thinking at the time what a giant moral hazard this was. Privatize the profits, socialize the losses.

Now of course we stuff private banks foreign and domestic full of cash in an embarrassingly direct fashion, barely screened by the skimpiest of fig leaves. Concern over the actions of fusty old Fannie/Freddie seems quaint by comparison.

[Account Deleted]

I'm not looking forward to any help from the state AG's. According to what I read on Naked Capitalism about what's in the Grand Settlement being proposed, it looks like a big sell-out so the AG's can protect their campaign contributions from the banks. None of them, so far, seem to be interested in even investigating the foreclosure fraud, much less doing anything about it.

[MikeC]

The genesis is not Fannie and Freddie, but rather the credit rating agencies whose fuzzy math allowed subprime or lower credit scores to be pooled together and sliced and diced and somehow now equivalent to a AAA credit for a fraction of the insurance premium that would have required. Fannie and Freddie were certainly willing to whore out their rating for cash but only because the scorekeepers dropped all credible payoff analysis. This is where the greed and stealing started.

[Richard Davet]

The ratings agencies are merely paid "players" in the GSE Business Model. This same GSE Business Model is now financed by the taxpayers.

[mortgage compliance services]

Fannie and Freddie are bigger problems for many acting as guarantors. Absolutely! I really believe on this.

[T. McNeil]

Mr. Davet I just became aware of your case. Where does it currently stand now? Do Not Give Up!!! You are an inspiration to Anyone who knows of your story, wishing you the best of luck!!!