Fannie, Freddie say mortgage servicers triggered foreclosure crisis

By Zachary A. Goldfarb
Washington Post Staff Writers
Wednesday, December 1, 2010; 10:38 AM

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."

Mortgage industry executives have argued for weeks that they are foreclosing only on borrowers who deserve it for missing their monthly payments.

But consumer groups and attorneys contend that many homeowners are being pushed into foreclosure because of errors or bad advice by the companies managing their loans - an issue that will be a core focus of the Senate banking committee hearing.

Many borrowers, foreseeing financial difficulty ahead, were told by their mortgage servicers to miss payments in order to get a loan modification. But after doing so, homeowners were served foreclosure papers instead of getting the modification, the advocates say.

In other cases, borrowers accrued late fees without their servicer telling them about the fines. The company would then consider the borrower in default of the loan.

The hearing follows a similar one last month by the committee during which Diane Thompson, an attorney with the Consumer Law Center, estimated that over half of the foreclosure cases she defends involve servicer problems.

Lawmakers plan to probe the cause of such "servicer-driven foreclosures" - and question regulators over whether they are adequately watching the activities of mortgage servicers. Scheduled to testify are senior officials from the Treasury Department, Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency.

"The problems currently in the news may be just the tip of the iceberg," said Sen. Christopher J. Dodd (D-Conn.), the committee chairman. "The mortgage servicing industry may be plagued throughout with more systemic failures."

These "are problems that may result in homeowners being put at unnecessary risk of default and foreclosure," he added.

Several of the nation's largest mortgage companies have acknowledged problems with their servicing operations. The largest, Bank of America, has pledged to put an end to the "dual track" process of negotiating loan modifications with borrowers at the same time they are being foreclosed upon.

The hearing, the final one for Dodd before he retires from the Senate, will also feature testimony from senior Fannie Mae and Freddie Mac executives, who will be on the witness stand for the first time since the uproar over foreclosures began.

Fannie and Freddie are expected to defend their practices while laying the blame for any problems in foreclosures on the law firm and mortgage servicers who oversee the process on their behalf. The companies have threatened financial penalties against these firms if they do not take corrective actions quickly.

Another issue that is likely to be raised this week on Capitol Hill is whether banks in many cases are trying to foreclose on borrowers when they lack the legal standing to do so. Besides Dodd's committee hearing, a separate hearing on the foreclosure debacle is being held Thursday by the House Judiciary Committee.

Doubts about the legal standing of banks are being raised amid allegations that they did not properly transfer paperwork proving the ownership of mortgages as they repeatedly traded the loans to investors.

In a case in New Jersey, for instance, a Bank of America executive, Linda DeMartini, testified that it was customary for the big lender Countrywide to hold on to the ownership documents even after the loans were pooled together, turned into securities and traded around the world. Bank of America bought Countrywide in 2008.

In a Nov. 16 decision that alarmed the mortgage industry, Chief Judge Judith H. Wizmur of U.S. Bankruptcy Court in Camden, N.J., denied a foreclosure against a homeowner based on Countrywide's failure to pass the documents to the proper party.

Bank of America has said that the situation was an aberration and disputed DeMartini's sworn testimony, saying she was mistaken.

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