(NOTE: Want to learn how to flip houses to hedge funds? Click here for our “Partnering With Hedge Funds” special report.)
The Inspector General of the Federal Housing Finance Agency (FHFA) recently released a report detailing Freddie Mac’s failure to supervise its loan servicers for their professional and conscientious handling of consumer complaints.
Officially known as “escalated cases”, these varied complaints are accusations against the federal agency's services to borrows like you, generally concerning five separate categories of systematic failure:
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Failure to follow Freddie Mac servicing guidelines
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Allegations of fraudulent servicing practices
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Failure to properly evaluate a borrower for foreclosure alternatives
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Unfair denial of foreclosure alternatives
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Violations pertaining to policy timelines for evaluations and borrower response time
And who bears the penalty for Freddie Mac’s failure? The Inspector General summarized it beautifully in his report…
“Servicers’ failure to resolve quickly escalated cases can prevent foreclosure alternatives from being adequately explored and may result in losses to the enterprises.”
In other words, the failure to provide timely responses to these complaints leads to unnecessary foreclosures and taxpayer losses. But far more staggering, and quite literally unbelievable, are the things that went unreported.
This Impacts Your Business In Numerous Ways
Why should entrepreneurial real estate investors like you care about this recent FHFA report? Why does this stuff matter to us? Well, for starters, consider the power that these loan servicers currently hold over numerous aspects of our industry:
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They are in charge of implementing the new valuation methodology for both REOs and short sales.
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They are on the front lines implementing the Standard Short Sale Program, something we fought to create for two years.
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And servicers are the first to consider appeals for additional exemptions to flipping restrictions that we argued to FHFA should be implemented.
In the Distressed Property Coalition’s Standard Short Sale Briefing, we include the information provided to servicers so that investors can use the same playbook as the servicers. After reviewing this report, I have almost no confidence that servicers are properly trained, have proper oversight, or frankly have any idea what they are doing. We view this report as a call to action to protect small investors by urging FHFA to implement more stringent servicer oversight guidelines, and we have already begun preparing for those meetings.
Freddie Mac owns or guarantees 10.6 million mortgages with a combines $1.6 trillion in unpaid principal balances. According to the Inspector General, the eight largest servicers handle 70% of its loans. Four of those servicers: Bank of America, Wells Fargo, CitiMortgage, and Provident, failed to report a single complaint from October 2011 through November 2012. The problem? These four servicers received over 20,000 complaints during that timeframe!
And It Gets Worse…
According to the report, 98% of all servicers (including the four referenced above) did not report a single complaint. The Inspector General considers this highly unlikely, first because we already know of more than 20,000, and second because those 98% handle 6.6 million loans. To be clear, Freddie Mac actually believed there was no issue, and that out of 6.6 million loans being serviced, not a single consumer had a complaint with the process. Brilliant.
How could this happen? According to the report: “This lack of compliance is a result of Freddie Mac’s failure to assess escalated case requirements in its servicer reviews and to include consequences for noncompliance in its Servicing Guide.”
It’s not as if Freddie Mac failed to inspect its servicers. The top 38 were subjected to onsite inspections, and Freddie did not take any issue at all with the fact that virtually none of them were reporting consumer complaints. I am reminded of a Robert DeNiro line from “Casino” while berating an employee: “You were either too stupid to know you were being scammed, or you were in on it!”
Politicians in Washington today clamored about these findings. But not for the reasons you may think. As the Administration seeks to replace acting FHFA Director Edward DeMarco with a replacement who will approve principal reductions – an action DeMarco has resisted because of the taxpayer liability (a unilateral 15% reduction on Freddie alone would leave taxpayers with a $240 billion bill) – Capitol Hill is using this report to denounce Mr. DeMarco.
The report is less damning of FHFA than politicians who want to leave taxpayers with more debt. Here are two important quotes from the report regarding FHFA:
“FHFA does not specifically advocate for consumers or resolve consumer issues. Instead, it uses consumer complaint information to improve regulatory oversight.”
“Rather than independently testing servicers’ compliance with complaint reporting requirements, the FHFA examination team relied exclusively on Freddie Mac’s onsite operational review reports, which did not mention problems with servicer reporting.”
The Bottom Line
In simple terms, FHFA screwed up by believing Freddie Mac’s onsite inspection teams were competent. But the facts contained in the report lead to several inescapable conclusions:
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Servicers deliberately shielded consumer complaints
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Freddie Mac had to have known it was happening
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And many consumers unfairly lost their homes because of this.
And who gets stuck with the bill? The taxpayer.
And who gets hurt if nothing changes? Homebuyers and small investors.
John Grant
is the president of the Distressed Property Coalition, a private advocacy effort formed by the top leaders in the residential real estate industry, and dedicated to private market solutions, smaller government, and protecting taxpayers. DPC exists because investors deserve an easier path to buy and sell houses. Investors deserve to shape policies that govern them, not to be subjected to them. Investors deserve better information on current laws and policies. Investors deserve a safe environment to learn more about the industry. DPC is dedicated to providing these services to the residential real estate community. Their content and track record of success in Washington are unprecedented for this industry.
To received Mr. Grant’s policy briefings and newsletter, please visit www.distressedpropertycoalition.com