Attorney General Martha Coakley filed a lawsuit against Fannie Mae and Freddie Mac in Suffolk Superior Court today, saying the two federally-backed mortgage giants are in violation of Massachusetts law because they refuse to participate in programs which allow delinquent homeowners to "buy back" their homes at reduced prices.
Various buyback programs have been developed by nonprofit groups aiming to keep delinquent borrowers from losing their homes. The nonprofit approaches the lender and offers to buy the foreclosed home. The nonprofit then sells the home back to the former owner, who obtains a new loan based on the reduced price.
Many lenders are reluctant to engage in such programs, fearing that they will receive less for the property than they would obtain on the open market, and that the programs incentivize homeowners to default in order to obtain new loans with substantially lower payments.
Fannie and Freddie specifically require that all homes sales for their distressed properties be "arm’s length" transactions, in which there is no connection between the former distressed owners and the new purchasers, and that if the former owners do attempt to repurchase a foreclosed property, they may only do so if they "make whole" the lender; that is, pay back the full amount due on the original loan.
Fannie and Freddie’s refusal to engage in foreclosure buyback programs is unfairly and illegally causing Massachusetts families to lose their homes, Coakley alleges, in violation of the commonwealth’s 2012 foreclosure prevention law. Among other provisions, the law prohibits creditors from blocking home sales to nonprofits simply because the nonprofit intends to resell the property back to the former homeowner.
Buyback programs prevent needless displacement of families that through an arrangement with a nonprofit can afford to stay in their homes, and Fannie Mae and Freddie Mac have continued to block buybacks even though they lose money in the process, Coakley’s suit alleges.
"It makes no sense for our federal government to stand in the way of this work to help struggling families stay in their homes, and it is illegal for Fannie and Freddie to do this in Massachusetts," Coakley said in a statement. "For too long, Fannie and Freddie have been roadblocks to progress in addressing this foreclosure crisis, and I urge them to immediately reverse their policy on this common-sense program."
Since 2012, Coakley has encouraged principal reduction by Fannie and Freddie as a critical foreclosure prevention tool. In an April 2012 letter to then-Acting FHFA Director Edward DeMarco, Coakley was joined by 10 other attorneys general urging Fannie and Freddie to permit principal reduction in loan modifications. Despite a change in leadership, Fannie and Freddie continue to prohibit principal reduction.
Coakley sent another letter last month to FHFA’s new director, Melvin Watt, stating that the current policies are in direct conflict with Massachusetts law and represent an economic loss for taxpayer-owned Fannie and Freddie.
