Sunday, October 24, 2010

Fannie, Freddie Seek End to Freeze

Fannie, Freddie Seek End to Freeze


Fannie Mae and Freddie Mac have taken a leading role in preparing and endorsing an agreement between banks and title insurers that is designed to help restart foreclosure sales, according to people familiar with the matter.


As foreclosure-paperwork problems erupted last month, some title insurers stopped issuing policies on certain properties amid concerns that banks hadn't properly processed foreclosures and that the insurers would face losses. Banks, along with Fannie and Freddie, were forced to suspend sales of those properties. As delays mount, so, too, do the costs of maintaining unsold homes.

Fannie and Freddie have been working with insurers and servicers to hammer out a model indemnification agreement that could be adopted industrywide. The mortgage-finance firms have held conference calls to hash out details while lawyers trade new drafts of the proposed agreement, which has grown from a few paragraphs to several pages, people familiar with the negotiations said.

The behind-the-scenes work illustrates how, as banks prepare to resume home repossessions, few entities have a greater interest in helping to put the foreclosure train back on track than Fannie and Freddie, which together own or guarantee half of all U.S. mortgages.

"They're in a position to pursue good, straight, and solid answers. In that way, they play a quasi-regulatory role," said Kurt Pfotenhauer, chief executive of the American Land Title Association, a trade group.

The agreement with title insurers and servicers would be similar to one signed between Bank of America Corp. and the nation's largest title insurer, Fidelity National Financial Inc., to indemnify the insurer against any losses that result from bank errors in the foreclosure process. Fannie and Freddie have also taken steps in recent months to boost oversight of how mortgage servicers handle loan modifications.

Still, the foreclosure-document crisis is raising an age-old question that has dogged the mortgage firms: Should they play the role of regulator, or business partner, with the mortgage originators and servicers that are their customers?
On one hand, Fannie and Freddie need to make sure foreclosures are proceeding properly. But on the other hand, they want to move the process along as fast as possible because each day that they can't repossess homes, they lose more money and ring up a bigger bill for taxpayers.

"Given their public purpose and the special advantages they have in the marketplace, Fannie and Freddie should be a model to the whole industry of how to make sure the foreclosure process is working properly," said Julia Gordon, a senior policy counsel at the Center for Responsible Lending.

But the firms' regulator, and the companies themselves, say that the onus is on servicers to fix any problems and vouch for the quality of their foreclosure processes.

Fannie Mae "is not in a position to be the determining body as to whether servicers are putting processes in place that comply with the law," a company spokeswoman said.

Fannie and Freddie don't actually issue mortgages, but purchase them from banks and sell them to investors as mortgage-backed securities, providing guarantees to cover losses when loans default. They are largely reliant on banks and other firms to service those loans, or to handle day-to-day management, including decisions on how to modify loans or to pursue foreclosure when a borrower falls behind on payments.

By virtue of their size, they largely designed the current servicing infrastructure. The firms provide lists of vendors that are approved to handle everything from issuing foreclosure filings to selling homes. Detailed bulletins spell out how much servicers can spend at every step along the way.

The arrangement worked when defaults were low. But as servicers deal with a flood of delinquencies, their decisions could have an outsized impact on Fannie's and Freddie's bottom lines. At the same time, servicing is concentrated among a few players, giving the mortgage firms little choice.

In late August, Fannie put servicers on notice that they could face fines if foreclosures became unreasonably prolonged. Foreclosures were expected to pick up pace.

But just as that was happening, Ally Financial Inc.'s GMAC Mortgage notified Fannie and Freddie about flaws in its foreclosure process in 23 states where foreclosures must be processed by courts. On Sept. 1, Freddie suspended foreclosures or sales of properties in 23 judicial states where the loan was serviced by GMAC.

Since then, as GMAC and other major servicers suspended foreclosures, Fannie and Freddie have been unable to sell a big chunk of their pile of nearly 200,000 foreclosed homes, valued at around $19 billion.

Mortgage owners stand to lose $1,000 per property for each month that a foreclosure is delayed, according to estimates by FBR Capital Markets. That means Fannie and Freddie could face steep costs for every month that they can't sell homes.

Fannie and Freddie, taken over by the U.S. government two years ago, have cost taxpayers $135 billion. On Thursday, the firms' regulator said that the tab could grow to $259 billion if the economy falls into another recession.

Write to Nick Timiraos at

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