Senators Ask that Conservatorship Freeze Foreclosures on GSE Mortgages

Four U.S. Senators have asked the conservators of Freddie Mac and Fannie Mae to freeze foreclosures on mortgages held by the companies for 90 days and to take immediate steps to assist homeowners by modifying delinquent loans.

Senators Sherrod Brown (D-OH), Bob Casey (D-PA), Robert Menendez (D-NJ), and Charles Schumer (D-NY) wrote a letter on September 11 to Herb Allison new CEO of Fannie Mae, Dave Moffett his counterpart at Freddie Mac, and James Lockhart, director of the Federal Housing Finance Agency who serves as conservator of the two entities.  The letter urged the three to "help victims of the housing crisis save their homes, improve [their own] fiscal well-being, and stabilize housing prices by reducing the excess supply of homes on the market."

The letter said that the housing crisis continues to devastate too many American families and that some of these homeowners could remain in their homes and see their mortgages once again perform if they could obtain a loan modification.  The Senators said that, even though Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have encouraged lenders and servicers to facilitate such modifications neither Freddie nor Fannie have gone as far as many private lenders in doing so. 

The letter cited the experience of the Federal Deposit Insurance Corporation (FDIC) with assets they have seized from failed banks.  FDIC finds that a foreclosed mortgage typically pays the lender $0.30 on the dollar but a mortgage that is modified so as to be affordable for the borrower typically pays nearly $0.90.  "Clearly," the Senators said, "modifying at-risk mortgages maximizes the value of these assets."

The Senators called on Fannie Mae and Freddie Mac to invoke a 90 day moratorium on all pending foreclosure proceedings on "whole" mortgages in their portfolios in order to conduct an immediate and thorough review of the mortgages.  Since Freddie and Fannie are the owners of these loans, there should be little or no limitations on what the companies do to modify them.

The lawmakers also asked that the companies review and consider changing their policies governing loans involving Mortgage Backed Securities (MBS) issued by the two agencies.  They cited as an example a rule in Fannie Mae's servicing guidelines specifying that MBS loans can only be considered for modification once they are 120 days delinquent and that the servicers must first purchase the loan from the MBS before any modification.  "There is little question," the letter states, "that both of these requirements significantly reduce the likelihood that problematic loans will be modified."  Also, requiring a four month delinquency to qualify for a modification increases the chances that the homeowner will be forced into foreclosure.

The letter says that, since Fannie Mae and Freddie Mac are already guaranteeing the loans in their respective MBS portfolios, there seems little reason for maintaining policies that limit modifications that may keep families in their homes and maximize the value of these assets.  Such changes would also reduce risks to taxpayers and alleviate the downward pressure on house prices.

The FDIC, which closed megabank and giant mortgage lender IndyMac this summer, almost immediately announced a temporary moratorium on foreclosing on assets from that bank while it tries to modify as many delinquent loans as possible.  The Senators suggested the FDIC freeze as a useful example.

The New York Times criticized the Senators' request as one that could inflate the cost of the conservatorship to taxpayers and said that a large share of the people who would benefit from the freeze and proposed modifications would be the somewhat affluent borrowers who took out riskier Alt-A mortgages that did not require large (or sometimes any) down payments or any documentation of borrower incomes.  This, the paper said, is because the senators limited their request to actual mortgages not to bonds backed by mortgages that Freddie and Fannie are holding in their own portfolios.  The Times piece said that, while Freddie and Fannie either purchased or guaranteed about $5.3 trillion in mortgages and MBSs, Fannie Mae owned only $342 billion in "whole" loans as of the end of July and Freddie Mac held $93 billion in its portfolio.

A spokesperson for the Federal Housing Finance Agency confirmed that Mr. Lockhart had received the senators' letter and is reviewing the issue.