Posted on Thursday, December 2, 2010
One of the country's top banking regulators testified Wednesday that Fannie Mae and Freddie Mac were partly responsible for the national breakdown in foreclosure practices because they created an unwieldy bureaucracy of loan servicers and lawyers, resulting in flawed practices and shoddy legal documents.
But representatives of the two giant mortgage companies told a Senate hearing they were not to blame because managing foreclosures was the job of other firms they hired.
Acting Comptroller of the Currency John Walsh, who oversees the nation's largest banks, said in prepared testimony before the Senate Banking Committee that Fannie and Freddie's procedures generated overwhelming massive amounts of paperwork.
Fannie and Freddie "require servicers to use law firms approved for particular geographies when preparing foreclosure filings," Walsh 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."
He noted, for instance, that one large mortgage servicer has said it uses more than 250 different affidavit forms.
Executives from Fannie and Freddie defended their companies, however, pointing instead at the banks and law firms with which they 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 frontline operators and points of contact with the borrowers," said Terence Edwards, a Fannie executive vice president.
The view was echoed by Donald Bisenius, an executive vice president at Freddie, who said that his firm "provides guidelines for the origination and servicing of our loans, and contracts with sellers and servicers to carry out these operations."
The hearing marked the first time executives from Fannie and Freddie have been called before Congress to discuss problems with foreclosures, including practices that are at times improper, fraudulent or deny borrowers a fair chance to rework the terms of their mortgages to make them more affordable.
As the nation's largest mortgage companies, Fannie and Freddie have great sway in shaping how banks and other firms operate in evicting homeowners who have defaulted on their loans.
The hearing was also the last presided over by Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), who will step down at the end of the year. As committee chairman, Dodd has held hearings examining the worst economic crisis in generations and lent his name, along with Rep. Barney Frank (D-Mass.), to a sweeping law overhauling financial regulations.
On Wednesday, Dodd invited Fannie, Freddie and a host of federal financial regulators to discuss the fallout of the foreclosure crisis. In the past three months, evidence of deeply flawed foreclosure practices have come to light.
"Whether it was out of greed or ignorance or the failure to recognize the disaster on the horizon, we now are left, of course, to pick up the pieces of this problem and to try and help homeowners caught up in the forces beyond their control and to do everything in our power to fix the system and prevent these problems again in the future," Dodd said.
At the hearing, Federal Reserve governor Daniel K. Tarullo said the problems run deep.
"The problems are sufficiently widespread that they suggest structural problems in the mortgage servicing industry," Tarullo said. "It has now become evident that significant parts of the servicing industry also failed to handle foreclosures properly."
Bisenius, of Freddie, and federal regulators disagreed over the practice common among mortgage servicers to begin the foreclosure process even while they are discussing with borrowers the possibility of modifying their loans to make them more affordable.
Bisenius defended this dual-track approach, saying financial firms need to be ready to foreclose if a loan modification isn't worked out. Noting that foreclosures usually last well over a year, and sometimes nearly two, he said: "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."
He said the costs can be up to $15,000 per year for every defaulted loan, not including the additional losses resulting from a vacant property remaining unkempt and weighing down property values.
"It is vitally important that the modification process be brought to conclusion before a foreclosure sale is scheduled," Federal Deposit Insurance Corp. Chairman Sheila Bair said in prepared testimony. "Failure to coordinate the foreclosure process with the modification process risks confusing and frustrating homeowners and could result in unnecessary foreclosures."
By Zachary A. Goldfarb
Washington Post Staff Writer