Fannie Mae and Freddie Mac, the two mortgage finance giants whose financial woes required massive taxpayer bailouts in recent years, could be missing out on as much as $4.6 billion in payments from foreclosed mortgages in their portfolios, a federal investigator said.
Freddie Mac alone has not dealt with about 58,000 foreclosures on single-family homes, letting the borrowers go into default instead of paying back the loans, according to the investigation conducted by the inspector general of the Federal Housing Finance Agency.
The inspector general said many of those in default are not disenfranchised families down on their luck. Instead, they have the financial capability to pay back their loans, and investigators say the mortgage companies should be more aggressive in getting their money back.
Among those not pursued were real estate investors and others who failed to repay their housing loans while staying current on other bills, the inspector general's review found.
"Freddie Mac eliminated any possibility of recovery when it did not refer foreclosed mortgages for evaluation of collectibility," the inspector general said, and disorganization cost the mortgage company 6,000 potential foreclosures because the statute of limitations expired.
The numbers are even worse for Fannie Mae, which the watchdog agency said did not pursue 44,600 cases because the statute of limitations expired. The inspector general said it's uncertain how many of those mortgage holders would have been able to repay.
Inaction by Fannie Mae, Freddie Mac and other companies causes a high level of "non-recourse lending." This type of lending carries few consequences because businesses legally can't or won't pursue people who default on their mortgages, said Edward Pinto, a housing finance analyst at the American Enterprise Institute, a conservative think tank.
"That leads to moral hazards because people look around and say, 'Well, no one's going to come after me,' so they walk away," he said.
Foreclosures are supposed to be rare, but the level of foreclosures in the U.S. remains high four years after the end of the Great Recession, Mr. Pinto said. There is a danger that the federally backed housing finance system will send the wrong message to the market by not aggressively going after people who default on loans.
"People view it as an entitlement instead of a debt they're supposed to pay back," he said, adding that the number of defaults on mortgages was one of the chief causes of the recession, which started in late 2007.
Rep. Jeb Hensarling, a Texas Republican, said federal housing agencies have strayed too far from their original mission, instead becoming the nation's largest subprime lenders.
"Hardworking American taxpayers are sick and tired of having to bail out Washington's failed housing policies," said Mr. Hensarling, the chairman of the House Financial Services Committee.
The committee narrowly approved legislation that would eventually end the government stewardship and financing of Freddie Mac and Fannie Mae, though the bill has yet to be taken up by the full House for a vote.
Dealing with 'deficiencies'
The official term for such cases is "deficiencies" — the difference between what the companies have lent out and what they have yet to be repaid.
The inspector general said both companies could be missing out on more than $4.6 billion that could be repaid by people who have defaulted on their loans.
Inspectors also criticized the Federal Housing Finance Agency for not keeping better oversight on the companies under its charge.
"As conservator of Freddie Mac [and Fannie Mae], FHFA is responsible for ensuring the enterprise conserves and preserves its assets," the inspector general said.
FHFA officials said they agreed with the inspector general's report and has made a number of changes to the way the deficiencies are dealt with. However, the agency warned that trying to get the money back is not always a simple process.
"It is important to note that even with improved processes, there is a critical cost/benefit analysis that must be done in determining whether to pursue deficiency judgements, and that the likelihood of significant recoveries is minimal," FHFA said in a response.
Freddie Mac officials said they were studying the report to "determine what, if any, changes to its current collection practices it should make," said Brad German, a spokesman for the McLean, Va.-based company told Bloomberg News on Wednesday. He added that the majority of the borrowers who face mortgage shortfalls don't have the funds to make additional payments.
Since 2008, the two mortgage giants have been controlled by the federal government and have received more than $187 billion in taxpayer-funded bailouts. Both companies are now solidly profitable as the housing market has rebounded and have paid the Treasury $132 billion in dividends, according to a bailout tracker kept by Pro Publica.
But the inspector general said Fannie and Freddie are leaving money on the table.
"Pursuing deficiency recoveries from those with the ability to repay may help reduce Freddie Mac's foreclosure-related losses," the inspector general said. "In addition, it could serve as a deterrent to borrowers who may consider strategically defaulting on their mortgages, despite having the ability to pay their contractual obligations."
In fact, investigators found that Freddie Mac tried to get payments back in only 17 states. In response to the inspector general's report, the company has begun seeking action in all 50 states. Fannie Mae did have some success pursuing delinquent payments, the inspector general said, but often didn't put a priority on cases in which state law required quick action, causing many to fall by the wayside as deadlines passed.
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