The lawsuit filed by Massachusetts Attorney General Martha Coakley against mortgage giants Fannie Mae and Freddie Mac last week charges the federally-backed mortgage giants with violating Massachusetts law by refusing to participate in programs to allow delinquent homeowners to “buy back” their homes at reduced prices.

Those include various programs developed by nonprofit groups which aim to let borrowers facing foreclosure remain in their homes. In a foreclosure buyback, 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 of the home. The largest such program in Massachusetts, the Stabilizing Urban Neighborhoods (SUN) initiative run by Boston Community Capital, has participated in 475 buybacks, according to the lawsuit.

Such programs can be important tools for nonprofits attempting to help families facing foreclosure, said Brenda Clement, executive director of the Citizens Housing and Planning Association, an affordable housing advocacy group. “[Buybacks] may not be a panacea for everybody, but we think if you help one or two or 10 families stay in their homes, it’s worth it,” she said. “We’re pleased that the attorney general is pushing hard on this as we continue to clean up the foreclosure mess.”

At Arm’s Length

Many lenders are reluctant to engage in buyback programs, fearing that they will receive less for the property than they would obtain on the open market. Fannie and Freddie specifically require that all homes sales for 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.

Spokespeople from Fannie and Freddie declined to comment on the lawsuit, but officials from both agencies have said in past that they fear authorizing non-arms’ length transactions, even to nonprofits, because that could encourage borrowers to default.

Maureen Flynn, an attorney and lead coordinator for the Coalition for Occupied Homes in Foreclosure (COHIF), has worked with delinquent borrowers to run a pilot program somewhat similar to a buyback: Former homeowners are allowed to stay on in the property as tenants after the nonprofit acquires it in a foreclosure sale. But even though the homeowner doesn’t retain an ownership interest in the property in the COHIF program, they, too, have been stymied by Fannie and Freddie’s rules.

“Fannie and Freddie are one of the biggest owners [of foreclosed properties] in Dorchester,” where her pilot program launched in 2012, she said. “We started negotiating with them two years ago on three properties. We were able to negotiate successfully for one, but all of a sudden something changed,” and the GSEs said they would not be able to sell to COHIF unless they group was willing to pay back the original loan in full.

“We can’t afford that,” added Flynn. “It’s a huge problem.”

One of the Fannie-owned homes her group aimed to purchase was subsequently sold to an investor at auction and flipped for more than double the price, a result which particularly irked Flynn.

Other large banks have taken a different view of the program, according to Flynn, who said her group had successfully worked with Bank of America and Wells Fargo in the past.

‘Roadblocks To Progress’

Fannie and Freddie’s refusal to engage programs like COHIF’s and SUN is unfairly and illegally causing Massachusetts families to lose their homes, Coakley charges in the suit. Among other provisions, the commonwealth’s 2012 foreclosure prevention law prohibits creditors from blocking home sales to nonprofits simply because the nonprofit intends to resell the property back to the former homeowner.

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.”

Coakley has been attempting to persuade Fannie and Freddie to authorize principal reductions when it modifies loans to prevent foreclosures, signing an open letter to then-Acting FHFA Director Edward DeMarco in April 2012, along with 10 other state attorneys general, urging him to change the GSE’s stance. 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. 

Email: csullivan@thewarrengroup.com