One of the most underreported stories of the recent global financial meltdown was the role played in the crisis by housing giants Fannie Mae and Freddie Mac, and their subsequent and continued government bailout. To date, the federal government has purchased nearly $143 billion in stock in these two companies, with pending requests from Fannie Mae to Treasury to purchase an additional $1.5 billion and from Freddie Mac for $1.8 billion. This is fast approaching the combined government and Federal Reserve bailout of AIG. Once these transactions are completed, the American taxpayers will hold $150.2 billion in stock from these two companies. And, this is not expected to be the sum total of these efforts, as the Obama Administration stated in December of 2009 that it will extend an unlimited line of credit to these "too big to fail" behemoths for three more years.
So what do the American people get for investing $86 billion and owning an 80 percent share in Fannie Mae? Have many millions of homeowners who are delinquent on their Fannie mortgages been helped? Has Fannie devised a method or a path to prevent the estimated 13 million foreclosures that will occur over the next five years?
Unfortunately, Fannie has decided to go down a different, far less productive path. It recently announced that it will sue underwater homeowners who "strategically default" on their mortgage payments.
That's right - Fannie is proposing to spend your taxpayer dollars to sue underwater homeowners.
A person facing foreclosure shouldn't be threatened with taxpayer-funded lawsuits during one of the most difficult moments of his or her life. That is why I've written a letter with my colleagues, Reps. Marcy Kaptur (D-OH), Raul Grijalva (D-AZ), Steve Cohen (D-TN), Zoe Lofgren (D-CA), Barbara Lee (D-CA), and Mike Honda (D-CA), asking Secretary Geithner and FHFA Acting Director Demarco to exercise the federal government's authority as Fannie Mae's conservator to suspend the implementation of this policy until Fannie, the Administration, and the Congress, seriously consider the many problems associated with this policy and determine whether it conflicts with the Administration's efforts to help keep homeowners in their homes.
The text of the letter is below:
August 31, 2010
The Honorable Timothy Geithner
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
The Honorable Edward Demarco
Federal Housing Finance Agency
1700 G Street, NW
Washington, D.C. 20552
Dear Secretary Geithner and Acting Director Demarco:
We are writing today to express our strong reservations about the policy announced by Fannie Mae to encourage its servicers to pursue deficiency judgments against "strategic defaulters." We believe that this opaque, overbroad, and punitive policy, as conceived by Fannie Mae, is a poor use of taxpayer dollars and will unnecessarily include individuals who are not choosing to default on their mortgage. Furthermore, this policy is one of many which seems to run counter to the national need to stem the tide of foreclosures which are devastating communities across our nation. Mr. Secretary, as owner of 80 percent of Fannie Mae, we respectfully request that you work with Acting Director DeMarco of the Federal Housing Finance Agency (FHFA), Fannie Mae's conservator, to use FHFA's authority to require Fannie Mae to suspend indefinitely this new policy until the Administration and the Congress have reviewed the implications, including cost, transparency, utility, and oversight, of this new policy and determined if it is in the best interest of the American people to have Fannie Mae pursue such a policy.
At a time of record deficits and a nation crying for the government to get its finances in order, it is also unclear why Fannie Mae is proposing to use taxpayer dollars to pursue legal judgments against individuals who will lose or have lost their homes, have wrecked their credit rating, and likely have little or no remaining monetary assets. Treasury has already invested $86 billion into Fannie Mae and considering Fannie Mae's dependence on federal dollars to exist and operate, we think pursuing expensive litigation against a vulnerable population when there appears to be little to no economic incentive is questionable at best.
The vagueness of this policy is also problematic. Under the proposed Fannie Mae policy, borrowers who are determined to have strategically defaulted on their mortgages will be subject to having deficiency judgments pursued against them in a court of law. However, it is unclear what transparent, objective criteria Fannie Mae is using to determine who is a strategic defaulter and who is not. Fannie Mae has also stated that an individual who pursues a mortgage modification in good faith will not be subjected to litigation. The problem with this aspect of the policy is that Fannie Mae has stated it will rely on the reports of its servicers to determine borrower intent. We have great concern with putting such faith in the servicers based on constituent feedback on the performance and objectivity of servicers based on their experiences, along with servicers' evaluations by the Government Accountability Office (GAO), the Special Inspector General for the TARP (SIGTARP), and the Congressional Oversight Panel (COP).
For example, the GAO states, "The most common complaints involved the difficulty in reaching the servicers or not hearing back from them in a timely manner." Furthermore, since the Treasury has yet to determine and implement metrics for assessing the servicers in terms of communicating with borrowers under the Making Homes Affordable Program, also know as HAMP, it is unclear that Fannie Mae would be able to rely on the servicers' performance either. The SIGTARP has also found that "...this lack of consistent standards [among servicers] could mean that servicers are inconsistently applying criteria..." The GAO continues, "However, a lack of specific guidelines has also led to significant variations in servicers' quality assurance programs."
Given the fact that Fannie Mae is the administrator of HAMP, and the above are just a small set of criticisms of HAMP, it is unclear that Fannie Mae could properly implement this new policy consistently against "strategic defaulters."
We request that the following questions be thoroughly and clearly answered by Fannie Mae and FHFA, and then the answers considered by the Administration and the Congress before Fannie Mae considers moving ahead with this questionable policy. These questions include:
• How much is this policy expected to cost Fannie Mae and the oversight agency to implement?
• Is this an appropriate use of taxpayer dollars, and if so, why?
• What effect will this policy have on the future of our nation's housing market?
• Is this policy consistent with the Obama Administration's foreclosure mitigation efforts?
• How much of the money returned to Fannie Mae from said lawsuits will be paid to the Treasury, and how much will go to the investors, and how were these percentages determined?
• How many lawsuits and in what states does Fannie Mae expect to pursue deficiency judgments?
• What are the clear, objective criteria for determining who is a strategic defaulter and who is not? Who worked to determine these criteria (names, position, corporation or agency for which each person works)?
• What agency will conduct the oversight of this policy, especially in regard to the servicers?
• How often will Fannie Mae and the agency conducting oversight assess the process and implementation of this policy by the servicers and what are the criteria of this assessment?
• What concrete, recordable attempts will be made to engage the borrower prior to a delinquency judgment being filed to resolve the situation prior to litigation?
• How much investor input was considered when creating this policy? Please include related documents and detailed summaries of meetings and conversations in which the investors gave input, as well as copies of emails.
• What evaluations and tests did FHFA use to determine the effectiveness and efficiency of this policy? Who completed these evaluations and tests? Please include the raw data from the evaluations and tests, as well as the models and processes used to analyze the data, as well as the conclusions of the analysis.
• What process was implemented at FHFA for approval of this policy? Who at FHFA was involved in the approval process?
Given the challenges, concerns, and questions raised by this policy, we believe that you should act with all deliberate speed to suspend the implementation of this program, initiate a comprehensive review its procedures and aims, and ensure that Fannie Mae answers thoroughly and clearly the above questions so that both the Administration and the Congress can review and work with the Treasury and FHFA to ensure that taxpayers' dollars are spent wisely.
Rep. John Conyers
Rep. Marcy Kaptur
Rep. Raul Grijalva
Rep. Steve Cohen
Rep. Zoe Lofgren
Rep. Barbara Lee
Rep. Michael M. Honda
cc: The Honorable Shaun Donovan, Secretary of Housing and Urban Development
cc: The Honorable Neil Barofsky, Special Inspector General for the TARP
cc: Michael J. Williams, President and Chief Executive Officer, Fannie Mae