A Detroit Free Press investigation raises some interesting questions about why government-owned Fannie Mae and Freddie Mac are pushing foreclosures over banks’ objections and whether they’re getting taxpayers a good deal on foreclosure sales for their taxpayer benefactors.
The paper’s Jennifer Dixon got hold of internal records showing that Fannie and Freddie are pushing bank servicers to foreclose on homeowners who are more than a year late on their payments—even if they’re negotiating a loan modification and the servicing bank requests an extension.
She found this:
The records cover Fannie Mae’s foreclosure decisions on more than 2,300 properties, a snapshot from among the millions of mortgages Fannie handles nationally. The documents show Fannie Mae has told banks to foreclose on some delinquent homeowners — those more than a year behind — even as the banks were trying to help borrowers save their houses, a violation of Fannie’s own policy.
Fannie Mae has publicly maintained that homeowners would not lose their houses while negotiating changes to mortgages under the federal Home Affordable Modification Program, or HAMP.
The Free Press also obtained internal records revealing that the taxpayer-supported mortgage giant has told banks that it expected them to sell off a fixed percentage of foreclosed homes. In one letter sent to banks around the country last year, a Fannie vice president made clear that Fannie expected 10%-12% of homes in foreclosure to proceed to sale.
The Free Press has some good anecdotes like this one that show us how self-defeating Frannie’s policy can be:
In October, Bank of America sought a delay for a California borrower who owed $416,786, was 13 months behind, and trying to close a short sale. “LOAN IS IN DOCUMENT COLLECTION PHASE,” the bank noted. “FILE HAS HAD 0 PREVIOUS POSTPONEMENTS.” Fannie Mae declined, noting simply, “Too delinquent.”
It’s far better for a mortgage owner to work out a short sale than to foreclose, which could cause the bank (or Frannie, in this case) to lose half or more of its money. The second installment of Dixon’s Freep probe shows that in Detroit, anyway, the bailed out-behemoths are dumping houses on the market at prices that are super-low even for that battered city.
A Free Press investigation, including an analysis of more than 700 real estate transactions in the past year, finds that Fannie and Freddie are selling foreclosed homes, on average, for a third less than the homes’ already deflated market value in some areas, and at less than half of market value in other neighborhoods.
It’s possible, of course, as Freddie’s flack says, that specific foreclosed houses have problems that make them go for less than their appraised values. They’re often left vacant for months or years and even when they’re occupied, people who get foreclosed on don’t have money to put into repairs. But it’s harder to explain why that would apply across neighborhoods, especially when the neighborhoods appear to have low appraisals:
Fannie and Freddie homes in Orion Township and Lake Orion sold, on average, for 70% of their value. Non-foreclosures sold at 114% of market value.
And in Independence Township and Clarkston, the Fannie and Freddie homes sold, on average, for 76% of market value, compared with the non-foreclosures that sold for 108% of market value, on average.
Or why buyers are almost instantly flipping houses they buy from Fannie and Freddie-sold houses and doubling their money, as the Free Press reports.
More damning still is the extremely small amount of time Frannie’s houses spend on the market in Detroit:
German, the Freddie spokesman, said the mortgage giant’s properties sell in an average of 110 days nationally. But in metro Detroit, Freddie’s own numbers show that its properties are selling far more quickly — in roughly 50 days. Property experts say that indicates the homes are listed too low.
Of the 72 homes that Freddie contracted for sale in Oakland County in April, 58 were on the market for less than a month before buyers signed contracts, according to data compiled by Braun.
I’d have liked to have seen a comparable number for non-foreclosure sales in Detroit, but I’m assuming it’s much higher than fifty days.
The broader question is why are Frannie doing dumb things that obviously make the housing problem worse? Dixon quotes a number of critics saying that the two are trying to unload their losses on taxpayers:
According to White, the Valparaiso professor, foreclosing on a home typically costs Fannie Mae far more than a successful loan modification. But, he and others say, Fannie is willing to absorb higher losses because it knows taxpayers — not Fannie Mae — will eventually reimburse the loss…
“Fannie would rather foreclose all the bad and marginal mortgages now, even at very high loss rates, while losses are on the taxpayer, so that when it is once again a private company, these risky mortgages will be gone, and will not result in losses for its shareholders,” he said.
And:
Georgia Institute of Technology accounting professor Charles Mulford, who studies how companies report their finances, said Fannie and Freddie feel no compulsion to maximize profits now that they are controlled — and subsidized — by the government. The companies, he said, are more interested in getting troubled mortgages, including foreclosed homes, “off the books so they can start anew, making new loans, loans that are more profitable.
My question here: Is it true that Fannie and Freddie think that they’re going to go private again at some point?
Part three of the series is coming up. Very good work by the Free Press.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.