Taxpayers and the federal government would be among the biggest losers if officials heed calls from some legislators and homeowners rights groups to stop millions of foreclosures across the country because of possible paperwork problems.
Fannie Mae, Freddie Mac and the Federal Housing Administration — already deep in red ink — back many of the defaulted loans and would sustain greater losses if foreclosures are delayed. The Treasury Department is majority owner of one of the biggest mortgage companies, Ally Financial, formerly GMAC, and would have to cover its losses, as well as Fannie’s and Freddie’s.
The federal government’s deep involvement in the mortgage market is the reason why, despite pledges to investigate and punish fraud in individual cases, regulators are also likely to work out a deal with banks and attorneys to keep the bulk of foreclosures on track to minimize harm to taxpayers and the broader economy, analysts say.
Despite much political posturing over improperly assigned foreclosure documents, “robo” signatures and other irregularities that have surfaced in recent weeks, regulators want to prevent any “major, lasting” interruption of the steady stream of thousands of foreclosed houses going up for auction each week, said Ed Pinto, a mortgage analyst at the American Enterprise Institute and former chief credit officer at Fannie Mae.
“Fannie, Freddie and FHA, along with FDIC-insured banks, own too many mortgages for the federal government to allow that to happen, particularly given that there does not appear to be any substantive questions” about the legal rights of banks and investors to foreclose against long-delinquent homeowners in most cases, he said.
Fannie and Freddie executives, with an eye on rising losses of as much as $150 billion a year that would add to their $148 billion federal bailout, warned processors this week to get their paperwork in order and said they want to keep the foreclosure process moving to minimize losses and further damage to the housing market.
Fannie Mae has become, by some measures, the largest residential property owner in the country as it has taken possession of the equivalent of all the homes in Tampa, Fla., as the result of defaulted mortgages that it guaranteed in recent years.
“As an industry, we just need to move quickly and get it done so there is not an overhang effect,” Fannie’s chief executive, Michael Williams, said at a Mortgage Bankers Association conference Monday in Atlanta.
Its important to “protect the rights of borrowers, but at the same time, if possible, not have a moratorium on foreclosures,” said Charles E. Haldeman Jr., chief executive of Freddie Mac. “Thats the balance weve been trying to achieve.”
While mortgage-servicing companies must take time to get the paperwork right, any fumbling on their part does not automatically absolve homeowners of their responsibility under the mortgage contract, analysts say.
With an all-time record of more than 14 percent of U.S. home loans either delinquent or in foreclosure, it was the “overwhelming amount of delinquencies” — not problems with securitization of the loans — that led to the paperwork problems, said Theodore Tozer, president of Ginnie Mae, the agency that turns FHA-backed loans into mortgage securities.
By the time of foreclosure, most loans are many months if not years behind payment, often with the homeowner still living in the house essentially rent-free until they are physically dispossessed by the bank.
“The regrettable truth is that many of the properties currently in the foreclosure process are either vacant or occupied by borrowers who simply cannot make even a significantly reduced payment and have been in arrears for an extended time,” Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., said at a mortgage conference Monday in Washington.
She said she has notified mortgage companies that the FDIC will not share any of the losses on defaulted loans in failed bank portfolios until the paperwork problems are corrected.
But she said that with millions of foreclosures pending or in the works, and the widespread use of mass-production law firms and foreclosure mills to handle the unprecedented volume, regulators may have to go further to ensure that the system doesn’t grind to a halt.
“Ultimately, this problem will require some type of global solution” to avoid further losses and harm to the economy from protracted litigation over documentation issues, she said.
“I would suggest that all interested parties consider some type of ‘triage’ on foreclosures, perhaps providing safe-harbor relief if the property is vacant or if the servicer offered a meaningful payment reduction — say a minimum of 25 percent — and the borrower could still not perform on the loan.”
Despite the threat to taxpayers and the broader economy, an army of attorneys for delinquent homeowners has stepped up foreclosure challenges in court.
Meanwhile, homeowners groups and some members of Congress, including Senate Majority Leader Harry Reid, Nevada Democrat, have called for a nationwide moratorium on foreclosures.
Some have suggested that banks should be required to rent the homes to the borrowers who have stopped mortgage payments. But most activists appear to be using questions about documentation to try to prod banks into offering big reductions on mortgage payments to the borrowers.
The Service Employees International Union, along with other community groups, staged a series of protests earlier this month demanding that banks halt all foreclosures “until all homeowners have had a full opportunity to modify their mortgage.”
Such a blanket moratorium could end up imposing an additional $150 billion a year of losses on distressed banks, mortgage investors and the government, said Robert Romano of Americans for Limited Government.
With foreclosed homes accounting for about one in four home sales, it would severely depress a market already skirting just above record lows. Sales and home prices are on the decline again after a short-lived revival spawned by a federal tax credit last spring.
“The housing market would seize up” if foreclosure sales are put on hold, he said, “all to allow delinquent borrowers to stay in homes they cannot afford.”
The foreclosure process already is plagued with delays, including waiting periods imposed by states before banks can take possession of properties and backups in getting cases on the docket at deluged courthouses.
Moreover, the federal government and many states have imposed numerous temporary moratoriums since 2008 that have had the effect of delaying the foreclosure process nationwide by almost a year, Mr. Romano said.
Now that the huge backlog of foreclosures is hitting the market in earnest, borrowers and activists are citing paperwork irregularities as one more reason to put off the inevitable, he said.
If another moratorium becomes a “Get out of jail free card” enabling delinquent homeowners to stay in their homes rent-free, that will only encourage other “underwater” borrowers to default and compound the crisis, he said.