Massachusetts’ attorney general is pressing the Federal Housing Finance Agency to allow Fannie Mae and Freddie Mac to reduce principal on distressed loans in her state through nonprofit programs and loan modifications, and she is prepared to use litigation to advance her agenda.
Martha Coakley, the attorney general for the Bay State, made the threat in a letter to Melvin L. Watt — who was only sworn in as FHFA director in January.
She noted that her office had several exchanges with former acting FHFA director Edward DeMarco, though no meaningful progress was made.
“However, since assuming FHFA’s directorship earlier this year, we have had very productive exchanges with your staff,” the letter said.
Coakley is pressing the regulator to allow loan modifications that allow principal reductions on distressed mortgages — which she claims create loans that are financially advantageous for lenders and investors while helping to preserve and conserve government-sponsored enterprise assets.
“While we recognize FHFA’s concerns surrounding principal reduction — based on predictions of moral hazard and strategic default — we ultimately believe them to be overstated and largely unsubstantiated,” Coakley said. “In other words, the abstract fear of waves of strategic defaulters is insufficient to justify a wholesale rejection of principal reduction as an available tool. To the degree that these concerns are legitimate, we believe that they can be addressed through thoughtful policy mechanisms, such as clear modification underwriting standards, a showing of hardship by the borrower, and shared home value appreciation.”
At a June 2013 senate hearing, Watt said he would consider principal reduction on negative-equity loans.
Coakley also seeks approval for the GSEs to allow buyback programs implemented by credible nonprofit organizations — which she says have been tremendously successful in her state.
The buyback programs enable not-for-profit institutions to purchase distressed properties at the current market value, sell the home back to the distressed borrower at the lower price and provide 30-year fixed-rate financing. Performance on such loans, according to Coakley, is better than the national average. Borrowers on nearly 500 loans have kept their homes through one such program.
“As a result, financing is extended only to those homeowners who can truly afford to stay in their homes, thus preventing displacement, avoiding the blight of abandoned homes, and stabilizing neighborhoods all in one thoughtful program,” the letter states.
Coakley explained that state law prohibits creditors from requiring 501(c)(3) tax-exempt organizations that acquire one of their properties not to resell or rent the property to the former borrower — which the GSEs have not yet complied with.
Coakley’s office has been in discussions with FHFA staff and hopes FHFA will expeditiously amend its policies.
“However, our office also is considering all available legal avenues — including litigation — to ensure compliance with Massachusetts law, should FHFA fail to promptly amend its policies to allow the GSEs to participate in credible buyback programs,” the letter says.
