NEW YORK -- For more than five years, many homeowners who complained about mortgage industry foreclosure abuses have wondered whether anyone with a financial stake in keeping them in their home was paying attention. On Thursday, with the release of a new report from a federal watchdog, they got their answer: No.
The report, by the inspector general of the Federal Housing Finance Agency, says banks and other companies that manage more than 10 million home loans for Freddie Mac "largely failed" to alert the mortgage giant to the most serious category of homeowner complaints, despite a requirement they do so. These "escalated complaints" often include the most serious allegations of misconduct, including improper fees, misapplied mortgage payments and a frustrating cycle of lost paperwork and unreturned calls. In some instances, the mismanagement has led to a wrongful foreclosure.
"The results are shocking on a number of different levels," said Steve Linick, the FHFA inspector general, in an interview with The Huffington Post. "It is surprising that servicers were not reporting in such large numbers, that Freddie was not on top of this, and that [the FHFA] did not catch it in its exam."
Four of the largest bank servicers -- Bank of America, Wells Fargo, Citigroup and Provident -- reported no escalated cases to Freddie Mac, despite handling more than 20,000 over a 14-month period, according to the report. Freddie Mac examiners did not notice that the mortgage companies were failing to disclose the complaints, nor did the FHFA, which relied on "incomplete" Fannie Mae examinations, the report concludes. The FHFA oversees the bailed out lenders Freddie Mac and Fannie Mae.
The report suggests a striking failure by the government-controlled Freddie Mac and its federal overseer to ensure that borrowers were treated fairly, even as news reports showed that abuses were broad and systemic and banks agreed to huge settlements to resolve abuse allegations. It comes at what could be a crossroads for the FHFA and its embattled acting director Edward DeMarco, whose tenure atop the agency may be drawing to a close after more than three years. Last week, multiple news reports indicated that President Barack Obama was considering nominating Rep. Mel Watt (D-N.C.) as permanent director, though that nomination would likely face a challenge from Senate Republicans who have praised DeMarco. DeMarco has refused to implement Obama's proposal to reduce the principal on underwater mortgages, preventing some foreclosures.
Congress created the FHFA in 2008 as a regulator with special powers to oversee and control Fannie Mae and Freddie Mac, which required more than $180 billion in taxpayer bailout money that they have not repaid. Despite their uncertain future, Fannie and Freddie control more than half of all U.S. home mortgage. Their rules for how the servicers they hire to manage those loans treat struggling homeowners are considered industry boilerplate. Also industry boilerplate, say homeowners and their advocates: their seeming disinterest in enforcing those rules.
Hundreds of thousands of foreclosed homeowners have filed legal complaints, or complained to bank regulators, that their mortgage company presented roadblocks preventing them from enrolling in a government-sponsored program that lowers home payments and helps prevent foreclosure. For homeowners and their advocates, one of the most puzzling aspects of the experience has been the seeming indifference of Fannie and Freddie, which have a financial incentive to keep borrowers in their homes, even if they are making lower payments. So why haven't the mortgage giants done more to intervene with the companies they pay to manage loans?
This report doesn't answer that question. But it does show that Freddie Mac, in many instances, simply wasn't aware of the problems. By not requiring servicers to submit data on serious complaints, there was no way for the company to ensure those complaints were being handled in a way that would satisfy legal requirements, which include helping homeowners avoid foreclosure.
Freddie Mac data revealed that 98 percent of its loan servicers reported no escalated cases over a 14-month period ending Dec. 31, according to the inspector general report. In response to this statistic, Freddie Mac officials suggested that the lack of reporting may indicate there were no escalated cases, the report says. This conclusion, the inspector general concludes, is "highly unlikely," given the 6.6 million loans these companies manage.
The report also found that the servicers failed to resolve roughly 20 percent of the escalated complaints within 30 days, as required. The worst-performing institution, Bank of America, failed to resolve nearly half its cases within the timespan. What this means is difficult to assess, however, given "notable instances of inconsistencies and inaccuracies" presented by the servicers for what constitutes "resolving" a case, according to the report.
The report also faults the FHFA for failing to validate data provided to it by Freddie Mac, a consistent criticism that the inspector general has levied in past reports. In 2011, the inspector general concluded that the agency was not doing enough to track homeowner complaints.
Freddie Mac did not respond to a request for comment. A Fannie Mae spokesman said he could not comment because he had not seen the report. A FHFA spokeswoman referred a reporter to a letter sent to the inspector general in response to the findings.
That letter appears to send a mixed message. The FHFA says that while it agrees with the "intent and the spirit" of the recommendations in the report -- which essentially boil down to better oversight of Fannie Mac -- carrying out specific recommendations "may be limited" in response to new mortgage rules issued earlier this year by the Consumer Financial Protection Agency.
Later in the letter, the FHFA says it "agreed with the intent of the recommendations" and would complete a plan to review escalated cases by June.
Bank of America did not respond to a request for comment.
A homeowner advocate, and a lawmaker who has been a frequent critic of DeMarco and the FHFA, said that the report was further evidence of the continued failure of government regulators and banks to help those struggling to save their homes.
"Yet again we've learned that servicers are not doing what they are supposed to be doing, and the government stands by and lets it happen," said Elizabeth Lynch, a housing lawyer with the nonprofit MFY Legal Services in New York.
“Today’s report reveals the latest in a sorry string of failures by FHFA leadership to protect American homeowners,” said Rep. Elijah Cummings (D-Md.). “After so many reports documenting the abuses homeowners have suffered at the hands of mortgage servicers, it is unconscionable that FHFA has failed to require mortgage servicers to properly handle tens of thousands of homeowner complaints.”