SPRINGFIELD, Mass. -- After two years of bewildering futility, John and Linda DeCaro thought they had finally found a way to hang on to their home.
They could no longer afford their mortgage payments and had slipped into delinquency. They could not refinance to take advantage of low-interest rates because they were among the nearly 11 million American homeowners who are "underwater," meaning that they owed the bank more than their house was worth. Bank of America had already initiated foreclosure proceedings.
Then in the spring of 2011, a nonprofit lender, Boston Community Capital, presented a potential fix, one it has used to aid some 200 underwater borrowers in Massachusetts over the last two years. The bank would buy the DeCaros' home at market value -- about $87,000, which was barely half of their mortgage balance -- and then sell it back to them for a little more, providing a manageable loan. Bank of America affirmed the sale price as fair value.
But one powerful obstacle stood in their way: Freddie Mac, the government-controlled mortgage giant, owned the DeCaros' loan. Freddie has a policy of refusing to approve so-called short sales -- those where the purchase price is lower than the mortgage balance -- unless the buyer signs a legal document promising not to resell the property to the original homeowner. The document bars the buyer from even renting the home to the initial owner.
In short, the deal could proceed only if the DeCaros gave up the very point of the transaction. They would have to surrender their home.
Linda DeCaro, 46, absorbed this turn of events as if she were being asked to renounce her identity. More than a financial asset, her home was the center of her existence. She and her husband had bought it from her brother almost a decade ago. Her sister lives around the corner. They all grew up in a house two doors down -- the same place where her parents still live, where the family gathers for dinner every Sunday evening, and where her 6-year-old daughter often plays while she is at work.
"This is my neighborhood," Linda DeCaro said. "This is all I know. I would never want to leave here. Everything that I have is here. The church that I was baptized in -- that's the church I belong to. My daughter's going to the same school that I went to. I don't sleep because I'm wondering, 'Where are we going to go?'"
Freddie Mac and its sister company, Fannie Mae, have been holding the line against intensifying demands that they forgive loan balances to stem the foreclosure crisis. They portray their resistance as a simple act of fiscal responsibility, one aimed at doing right by American taxpayers, who are on the hook for their losses. But an exploration of Fannie and Freddie's handling of underwater homeowners in this city in western Massachusetts -- where unemployment remains stuck above 12 percent and foreclosures have doubled over the past year -- suggests that the two companies are guided by considerations that extend beyond mere dollars and cents: They sometimes require that borrowers relinquish homes even when doing so does not improve the bottom line.
The experiences of four local families struggling to keep their homes reflect the broader costs of Fannie and Freddie's rejection of principal reduction, from the deterioration of properties to the dislocation besetting neighborhoods. Their stories highlight how local economies are being constrained by the unwillingness of underwater homeowners to spend, even on crucial things such as health care and home maintenance. They illustrate why some now accuse Fannie and Freddie of overriding taxpayer interests in pursuit of an ideologically driven goal: exacting retribution from delinquent borrowers.
"We see it as being about punishment and not about business," said Malcolm Chu, an organizer with Springfield No One Leaves, a community association of residents fighting foreclosure and eviction. "It's entirely about trying to make it clear that foreclosure is the worst possible thing that can happen and ensuring that the millions more homeowners who are underwater and not yet in foreclosure will keep on paying."
Edward J. DeMarco, who oversees Fannie and Freddie as acting director of the Federal Housing Finance Agency, has rejected calls to forgive principal balances, citing an agency analysis that concludes that other forms of relief -- such as loan modifications that defer payments -- better limit taxpayer losses. But that analysis has drawn withering criticism from housing experts who pronounce it intellectually disingenuous and colored by a predisposition against aiding homeowners.
Last week, word leaked that Fannie and Freddie's own assessments undercut DeMarco's insistence that principal reduction exacerbates taxpayer losses. New analyses prepared by Fannie and Freddie conclude that the two lenders would save money by forgiving principal balances and limiting future delinquencies, according to a report published by ProPublica and NPR.
DeMarco is reportedly mulling how to respond, as his staff explores the impact on the equation from a recent tripling of incentives paid by the Treasury Department to spur Fannie and Freddie to forgive principal balances.
DeMarco refused requests for an interview. His spokeswoman, Corrine Russell, disputed characterizations that the agencies under his oversight have sought to punish delinquent borrowers.
"Fannie Mae and Freddie Mac have been leading the effort on foreclosure prevention," she wrote in an email, adding that the two agencies have delivered 1.1 million permanent loan modifications since they came under the supervision of the Federal Housing Finance Agency. "These modifications typically lowered borrower payments by substantial amounts and have yielded positive results by keeping homeowners in their homes."
Freddie Mac acknowledges having a policy that requires short sales be accompanied by affidavits from buyers pledging to not sell or rent properties to the original owners. The policy was introduced in July 2010 in response to a growing incidence of short sale-related fraud, according to Freddie Mac spokesman Brad German. Con artists were stopping payments on their mortgages, employing friendly middlemen to buy their homes at fire-sale prices, and then flipping properties back to them, effectively cutting loan balances at taxpayer expense, he said.
"If everybody just got to swap their note for a smaller note by simply not paying their mortgage for a while, how is that a good business model for us?" German said. "We require that there is no side agreement. We don't want to leave money on the table if we can possibly help it."
He cited a report by CoreLogic, a real estate research firm, which estimated that, in 2010, one out of every 52 short sales of single-family homes was "part of a suspicious resale."
But the same report noted that professional investment companies -- as opposed to ordinary homeowners -- "are involved in a disproportionate percentage of suspicious transactions."
Some lenders are willing to approve short sales without prohibitions on selling or renting to the property to the original owners. Bank of America engages in such transactions with Boston Community Capital.
Any borrower who stops making a mortgage payment to take advantage of a short-scale scheme would damage his or her credit in the process, jeopardizing the ability to secure a mortgage, said Elyse Cherry, chief executive of Boston Community Capital. She added that her bank has a stringent process of checks aimed at limiting its vulnerability to dishonest participants.
"We don't want to be used for fraud either," Cherry said. "Freddie has taken the position that the mortgage crisis is really the fault of the homeowner. They are holding this position that if you assist one homeowner, then others will stop paying."
Fannie and Freddie together control more than half of all American mortgages. Their continued resistance to forgiving principal balances stands in the face of growing sentiment among housing experts that such a course is required to stabilize the housing market. The Obama administration previously opposed principal forgiveness, but now advocates it as a key piece of limiting foreclosures.
Meanwhile, political forces conspire to increase the pressure on Fannie and Freddie to go along, as public anger continues to seethe over the role that unsavory mortgage lenders played in putting many homeowners in peril, and as foreclosures mount. Bank of America last week announced a pilot program that will enable borrowers facing foreclosure to remain in their homes and pay rent.
DeMarco argues that Fannie and Freddie have been delivering the equivalent of principal forgiveness by deferring payments and lowering interest rates. Academic studies challenge his logic, concluding that cutting principal balances for underwater borrowers leaves them less likely to slide back into delinquency and constitutes a better deal for taxpayers.
The experiences of distressed homeowners here in Springfield illustrate the pitfalls of leaving large numbers of people underwater -- not just for borrowers, but for surrounding communities. They are more inclined to give up and accept foreclosure when the next financial shock arises. They are more likely to forego spending, out of fear that they will be forced to find shelter on short notice. And regardless of whether they are justified in doing so, whether it is courageous, selfish or contemptible, borrowers who are underwater are more likely to stop making their mortgage payments and walk away -- either by choice or through eventual eviction -- adding boarded-up buildings to the stock of distressed real estate pockmarking American communities.
"Ed DeMarco says he has an obligation to making sure that the taxpayer gets the greatest bang for the buck," Cherry said. "But the burden on the taxpayer is not just about the losses on Fannie and Freddie. It's what happens to the need for fire and police services when homes are abandoned, and what happens to communities when blight comes back. I can't figure out as taxpayers, how are we possibly better off blowing up our neighborhoods?"
Eunice Waweru, 38, lives on a street off Boston Road that used to buzz with children playing soccer and riding bicycles while their parents congregated on front porches. Not anymore. The family who lived two doors down -- fellow Kenyan immigrants with whom she attended church services -- lost their home to foreclosure two years ago. Their old place sits empty, and someone recently broke in, presumably looking to harvest leftover appliances, plumbing or wiring.
The house across the street was once home to a couple whose three children went to school with Waweru's daughter. It, too, is now lifeless. So is the house down the block, where Waweru's friends used to live.
"You don't know about these empty houses," she said. "Before, I never worried. You would see lights everywhere. Now, it's just dark when I come home. You just see darkness. You get scared. You don't know who might be there."
Yet when Waweru looks out from her front door at night, it is light that she fears, the glow of headlights on the patrol car that she imagines the sheriff will be driving when he arrives to tell her to get out, leaving behind what has been her home for the last seven years.