A foreclosed home in Winchester, Va. (Jay Mallin/ZUMA Press)

Mortgage giant Fannie Mae’s recent announcement that it will give homeowners facing foreclosure the chance to stay in their properties as renters for as long as a year is the latest aggressive move by the government to help troubled borrowers and tenants avoid being evicted. But as past efforts to stem the foreclosure crisis have already shown, even well-intentioned programs haven’t managed to reach significant numbers of people in peril – meaning any new approach faces a tough road ahead.

Image by: Matt Mahurin

The problem has been particularly widespread surrounding a provision in the law, called the Helping Families Save their Homes Act, that allows for borrowers with Section 8 affordable housing vouchers the option to also stay in their residences when their landlord is in foreclosure. Some tenants who call their state or local housing authorities in Massachusetts and Connecticut after a foreclosure eviction notice are mistakenly told they have to move, noted Judith Liben, a senior housing attorney with the Massachusetts Law Reform Institute, a nonprofit legal services advocacy group. Better training of housing authority staff would help fix the situation, she said.

“Even with well-intentioned policies, there’s a disconnect between a good idea put into law, and what really happens on the street,” Liben said. “We see that disconnect on the ground, all the time.”

Despite anti-foreclosure initiatives by the government and lenders, the housing crisis has continued to worsen. Foreclosure notices totaled a record high of nearly 938,000 in just the third quarter of this year, according to RealtyTrac, an online foreclosure database. The Center for Responsible Lending predicts a total of 9 million foreclosures by 2012. Vacant and abandoned foreclosed properties are adding to neighborhood blight problems. Renters increasingly have become caught as innocent bystanders, evicted often without notice when their landlord faces foreclosure.

The new federal protections are supposed to address that. But in some cases, tenants in foreclosed homes either can’t reach real estate agents in charge of selling the properties to let them know they want to continue renting, or they get incorrect information from agents and think their only option is to move out immediately, said Shelley White, litigation director at New Haven Legal Assistance in Connecticut. In some instances, law firms send misleading letters that imply a financial incentive to move, known as cash for keys, is a renters’ only option, she said.

“We’re definitely seeing a lot of problems with tenants that just get notes from Realtors that say the bank has foreclosed on your property, and it’s time to get out,” Wright said.

The difficulties in outreach to tenants comes as the government continues expanding options and assistance to borrowers and renters dealing with foreclosure. In addition to the new federal law, the Treasury Department plans soon to rollout its plan encouraging more short sales by offering financial incentives to lenders and borrowers. In a short sale, a homeowner sells his home for less than the amount owed on the mortgage, and lenders forgive the remaining loan balance.

Both Fannie and Freddie Mac earlier this year began allowing qualified tenants in foreclosed homes under their control to sign month-to-month leases. Freddie Mac also started offering former owners of foreclosed homes the month-to-month lease option. Last week, Fannie announced its new policy, which significantly expands on the idea, allowing some owners who didn’t qualify for a loan modification and can’t afford their mortgage  the option of staying on in their homes. The owner would voluntarily turn over the property to Fannie in a “deed for lease” transaction, instead of going through a lengthy foreclosure process. The former owners in exchange would be given the option to rent back their homes for at least a year. Unlike in a short sale, their credit is unlikely to take a hit because of the transaction. And even investors may be eligible, meaning they would turn over their properties to Fannie, but their tenants would have the option to remain.

“This is huge,” said Dean Baker, co-director of the Center for Economic and Policy Research, who proposed a similar own to rent idea when the financial crisis first hit two years ago.

Baker would prefer that Fannie’s new policy extend the the rent-back period even further, to five or 10 years. But, overall, Baker said Fannie’s program addresses the problem of growing numbers of vacant properties, and represents a shift to promoting rental policies as a foreclosure solution. “You’re guaranteed a year, and that gives you some stability and a chance to plan ahead,” he said.

He and others also described Fannie’s new program as a big step forward over some efforts currently in place to help renters in foreclosed homes.

Fannie Mae, for example, already gives renters in foreclosed homes the option to continue renting on a month-to-month basis, or to accept a cash for keys offer. According to Fannie’s data, the financial help has been a far more popular option. Since January, it has tallied 3,500 cash for keys agreements, and 300 signed leases. Fannie Mae spokesperson Amy Bonitatibus said the program was set up to offer both choices to renters. It is open to all tenants of Fannie Mae-owned properties, but she had no information on specifically how many tenants had been approached with offers.

The small number of leases signed isn’t really surprising, said Danilo Pelletiere, research director for the National Low Income Housing Coalition. The options to renters were offered post-foreclosure, by which time some tenants may have decided to make other living arrangements. Cash for keys can be a more attractive option than a month to month lease. The new federal tenant protection law also overlapped with Fannie’s program, so some tenants may not have felt a need to sign leases, he said.

Pelletiere and other advocates said they have much higher expectations for Fannie’s new approach for former owners. A deed for lease transaction can happen far more quickly than a foreclosure, and having a longer-term lease will be more attractive to many people. Fannie also has hired a national property management company to handle the new program, while its existing rental initiative for tenants uses local real estate agents and property managers.

“Because of the way it’s designed, it should do a much better job,” Pelletiere said. “That makes it much more likely that we’ll see a national response. It provides a way for Fannie to be proactive and to get to the property earlier. And it costs less than getting someone out of a home and foreclosing on them.”

Alan Mallach, a senior fellow at the National Housing Institute and the Brookings Institution, agreed. “What’s interesting will be to look at how many people this new policy affects,” Mallach said. “I think it will be significant.”

Pelletiere said he also found some encouragement in early results from Freddie Mac’s program earlier this year to rent back properties to former owners of foreclosed homes on a month by month basis. According to Freddie Mac’s figures, almost 12,000 units entered its portfolio of foreclosed homes between April and October. In 70 percent of cases, a borrower is working on a mortgage loan modification, leasing the home back, or accepting cash for keys. In another 27 percent of cases, the property was vacant by the time Freddie Mac took it over. In three to four percent of cases, an owner or renter faced eviction. Of those occupants who signed leases, two-thirds were owner occupants and one-third were tenants. Spokesman Brad German said he had no further breakdown of the numbers.

The long-held belief has been that owners would decline to become renters again, so having more owners than renters sign rental leases is an encouraging sign for Fannie’s new program, Pelletiere said.

Still, he and others noted the government wouldn’t be prompted to move toward a more aggressive rental policy if a greater number of loan modifications were successful. A recent report by the Congressional Oversight Panel for the government’s taxpayer-funded bailout program criticized the progress being made under the administration’s Making Home Affordable program, saying that in a best case scenario it would prevent fewer than half of expected foreclosures.

As foreclosure notices pile up, troubled tenants and borrowers don’t always understand they might be eligible for help, or they don’t know who to contact to apply for programs, or they just give up and leave upon a foreclosure – even in cases where they have new federal laws and programs intended to avoid evictions. To Liben, the Massachusetts housing attorney, one constant of the housing crisis has been that some people “get lost in the shuffle.” She’s waiting to see if that will finally change.

All that changed when the financial crisis hit, subprime mortgages tanked, and the government had to step in and bail out Fannie and Freddie last fall. Since then, the government’s efforts to prop up the two agencies has quietly become one of the biggest and most expensive bailouts, with the taxpayer tab expected to exceed $100 billion, CNN Money says.

And now comes the news the government wants to take another run at fixing Fannie and Freddie — by taking toxic mortgages off its books and placing them in a “bad bank” instead, The Washington Post reports.

The Obama administration is considering an overhaul of Fannie Mae and Freddie Mac that would strip the mortgage finance giants of hundreds of billions of dollars in troubled loans and create a new structure to support the home-loan market, government officials said.

The bad debts the firms own would be placed in new government-backed financial institutions — so-called bad banks — that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate.

All this is quite a big deal, The Post explains:

The moves would represent one of the most dramatic reorderings of the badly shattered housing finance system since District-based Fannie Mae was created by Congress to support mortgage lending during the Great Depression. Both Fannie Mae and Freddie Mac, based in McLean, have government charters to buy home loans from banks, which they then repackage and sell to investors. The banks can then use the proceeds to offer more loans to home buyers.

At Clusterstock, however, Joe Weisenthal isn’t impressed, saying this move will only leave Fannie and Freddie open to creating havoc in the housing market once again.

This is a terrible idea.

It’s not that it’s a bailout, as these schemes typically are. That ship is already sailed. We already know we’re going to guarantee every last dollar of their debt.

No, the problem is that we’ll be creating two new, reinvigorated GSE, with AAA balance sheets and government guarantees to match. This means they’ll be able to create havoc in the housing market all over again. Maybe they’ll start modestly, with strict guidelines or whatnot — but then, since so much of the turnaround plan revolves around bad lending practices (document-light lending, high LTV ratios, etc.) they very well may go straight back to their old ways. Certainly, the political pressure will be on them to prop up as much of the market as they can handle.

We’ve already bailed them out. Is it too much to ask that they slink quietly off into the night?

Treasury Department officials told The Post that any proposals are still in the early stages. The basic idea would be to use the “bad bank” for toxic assets, and then create new companies or agencies – the “good banks” – to attract private  investment to support mortgage lending.

Redoing Fannie and Freddie doesn’t seem to be in question; it’s the details that are under debate. Overhauling the two agencies will be huge, and one of the biggest challenges to come out of the housing crisis. So much for obscurity. A very public fight to remake the futures of Fannie and Freddie is on.

iStockphoto

Even as the Obama administration presses the lending industry to get more mortgage loans modified, the practice of forcing borrowers to sign away their legal rights in order to get their loans reworked is a tactic that some servicers just won’t give up on.

Waivers requiring borrowers to give up any legal claims related to their mortgages, even in cases where borrowers may be victims of predatory lending, are showing up sporadically in loan modification agreements under the Obama administration’s Making Home Affordable plan, consumer attorneys say. They were stunned to find the legal waivers still being used, despite more than a year of efforts – including calls from lawmakers – to get rid of them.

Illustration by: Matt Mahurin

“It was shocking to see that people are still being asked to waive their legal rights,” said Bruce Dorpalen, national director of housing counseling for ACORN Housing Corp. “I mean, this should be abolished. It’s incredible that it’s still in there.”

The Obama modification plan, launched five months ago as the centerpiece of the administration’s anti-foreclosure efforts, includes financial incentives for servicers to participate, with the government paying $1,000 for each loan they modify, and $1,000 per year for up to three years. The goal is to rework loans with more favorable terms and lower interest rates, and to keep delinquent borrowers or those at risk of default in their homes.

The Treasury Department’s published guidelines for the $75 billion taxpayer-funded program specifically prohibit the waivers. Mortgage giants Fannie Mae and Freddie Mac removed the waivers from their standard loan modification agreements earlier this year. But Diane Thompson, an attorney with the National Consumer Law Center, said she has seen legal waivers resurface in loan modification agreements by Aurora Loan Services, Ocwen Financial Corp., and other firms. She also is getting complaints about waivers in Bank of America agreements.

“The waivers continue to be an issue,” Thompson said.

Complaints about the waivers come just as the Obama administration tries to ramp up loan modifications under its plan, which has gotten off to a slow start. More than 200,000 trial loan modifications have begun under the program’s Home Affordable Modification Program initiative, the Treasury Department said, well short of the initial goal of 3 to 4 million agreements. On Tuesday, top officials from the Treasury Department and the U.S. Department of Housing and Urban Development met with 25 servicers to put pressure on them to complete more loan modifications – something Thompson described as a “come to Jesus” meeting. The administration will begin publicly reporting loan modification progress by individual servicers next month, HUD said in a news release. The government also will develop a “second look” program with Freddie Mac to make sure borrowers aren’t wrongly turned away.

But the re-emergence of the waivers shows how dramatic gestures or public shaming might not be enough. They’re an example of how problems exist deep in the the fine print of loan agreements — something media attention to a high-level meeting of servicers in Washington doesn’t address. The waivers prompt concerns about how carefully the program was put together, and how well Treasury is supervising it. And they raise questions about how effective it can really be, if there are no real consequences or penalties for doing loan modifications improperly, or for not doing enough of them.

Frustration over the program has been growing. Sen. Christopher Dodd (D-Conn) chairman of the Senate Banking Committee, sent a letter to Treasury Secretary Timothy Geithner last week, asking for an investigation into violations in loan modifications, including the waivers. Thompson testified before Dodd’s committee on July 16, providing copies of the waivers found in loan agreements.

Adam Levitin, a Georgetown University law professor and credit expert, said the inclusion of waivers by servicers being paid by the government to complete proper loan modifications is especially galling. It’s not clear how widespread the use of the waivers is. It’s also unknown many servicers are charging the government for loan modifications that include waivers, and how many are simply doing them independently of the government’s program. But it’s also obvious that the waivers aren’t rare exceptions, he said, and that the administration should be looking into them.

“Is Treasury paying money for this?” Levitin said. “If so, it’s like paying a government contractor for performing substandard work. Why are servicers getting millions of dollars for doing loan modifications if they’re not going to do them the right way? We’re relying on the servicers to do the right thing and time after time, they don’t do it. These companies just say one thing in front of Congress and then go and do something else. Treasury should be demanding its money back and handing out some penalties for this.”

The fact that the administrations’ main foreclosure program allows for a slip-up like the waivers also is troubling, he said. Getting loan modifications done “does not seem to be the top priority of this administration,” Levitin said.

Legal waivers in loan modifications have a long history. Until last summer, they were regularly included in loan modification contracts, often buried in a long list of requirements. Borrowers often had no idea they were signing their rights away. The waivers could mean that borrowers would have to give up all legal claims related to their mortgage, not just to the loan modification, even in cases where borrowers signed up for predatory loans they didn’t understand.

In a dramatic confrontation last July, Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, told representatives of Bank of America to get rid of waivers in their agreements. His pronouncement came after Bank of America representatives denied they were using the waivers – and Julia Gordon, senior policy counsel at the Center for Responsible Lending, produced one from her briefcase.

Then, in January, Fannie Mae and Freddie Mac also removed the waivers from their standard streamlined loan modification agreements, following a TWI story about the practice.

Advocates hailed the end of the waivers as a win for borrowers, who would no longer be forced to give up their rights to pursue legal action regarding their mortgages, in order to get a loan modification. As a result, they find the resurfacing of the waivers particularly troubling.

“At this point, it’s this constant whack-a-mole exercise,” Gordon said. “By this time, I would think the issue would have been aired sufficiently that servicers would be aware of this.”

Gordon added that the waivers illustrate that “there’s a lot of sloppiness out there” with regard to the administration’s loan program, which she finds disappointing.

For the program to work, there must be consequences for servicers that include the legal waivers or any other irregularities in their loan modifications, she said. “There shouldn’t be any gray areas here,” she said.

Thompson, of the National Consumer Law Center, said it’s possible that some servicers simply are using outdated forms that still require the waivers. Nonetheless, she said, it’s not in the servicers’ interests to get rid of the waivers in a timely manner – and some clearly aren’t doing so, she said.

Some advocates were particularly surprised to find that Ocwen had used the waivers, considering the servicer has been leading the industry in doing loan modifications. But Paul Koches, general counsel for Ocwen, said his company was just as surprised, and called their inclusion a mistake.

The waivers had been “fairly standard practice” in loan agreements for years, he said. But in late 2008, after meeting with representatives of the National Community Reinvestment Coalition and hearing concerns about the waivers, Ocwen agreed to remove them from all loan modification agreements.

The company assumed all the waivers were gone, until Thompson’s testimony showed otherwise. Ocwen then realized one of its old forms still included the waiver. Ocwen is working to fix the form. Only a handful of borrowers were affected, and they’ll be assured the waivers won’t be enforced, Koches said.

Including legal waivers “is no longer our policy and we will be so notifying the homeowners to whom we mistakenly sent the old version,” he said.

Bank of America stopped using the waivers in September of last year, said spokesperson Jumana Bauwens. She did not know why or how waivers might be showing up in Bank of America loan modifications, and said the bank had not been aware of complaints about them. Bank officials will look into the matter, she said.

Aurora Loan Services could not provide a representative to comment.

Dorpalen, of Acorn, said his staff saw waivers showing up in loan modification agreements in May. Counselors told servicers to take them out before allowing their clients to sign contracts, he said. Since then, the waivers haven’t appeared in loan modifications that his group sees, he said.

Some kinks in launching a new program are to be expected, and the Treasury Department doesn’t have past experience with loan modifications, Levitin noted. But it’s hard to remain patient with the slow pace of the administration’s efforts to slow down foreclosures, he said. At this rate, by the time Treasury gets all the program’s difficulties ironed out, it will be slated to expire.

“I lost patience a year ago,” Levitin said. “At this point, it’s just sad.”

Gordon, of the Center for Responsible Lending, said the waiver mess shows once again how Congress’ failure to approve mortgage cramdown legislation is adversely affecting foreclosure prevention. Allowing bankruptcy judges to modify mortgage loans was the “backstop,” if voluntary loan modification wasn’t enough.

Lenders that opposed cramdown argued that the loan modification program was a better choice, Gordon noted. But so far, loan modifications aren’t keeping pace with foreclosures, and some borrowers already in trouble are unknowingly signing their legal rights away.

And that’s not even the worst of it. RealtyTrac Vice President Rick Sharga told CNN Money the continuing high levels of foreclosures are altering the firm’s earlier predictions on the severity of the crisis.

“We had been predicting 3.4 million filings for the year,” he said, “but we’ll blow those numbers out of the water.”

As TWI reported last month, mortgage giants Fannie Mae and Freddie Mac ended their foreclosure moratorium on March 31, which added to the foreclosure spike.

CNN reports that the continuing free fall in housing prices is also contributing.

The loss of home values put many more mortgage borrowers underwater, meaning they owe more on their loans than their homes are worth. That increases foreclosure rates in two ways: Underwater borrowers have no home equity to draw on should to pay for unexpected expenses such as big medical bills or major car or home repairs. That’s makes them more likely to miss payments. And when home values fall far below mortgage balances, homeowners often walk away from their loans.

“There has been much more ‘deed-in-lieu-of foreclosure’ activity lately,” said Sharga. This is a transaction in which borrowers simply tell their banks that they’re not going to pay their mortgage and hand back their keys, and deeds, to their lenders.

“People are making the rational financial decision to walk away from underwater homes,” he said.

It’s not just subprime borrowers who are losing their homes in record numbers anymore; the crisis increasingly is affecting borrowers with prime loans who have lost their jobs or who have seen their home values tank.

Given all this, don’t expect May’s numbers to improve much. As we’ve noted before, nothing seems to stop the foreclosure machine — and today’s news suggests the problem will likely continue to get worse before it gets better.

David Kellermann, 41, was a longtime Freddie Mac executive who joined the firm as an analyst in 1992. Police were called to his stately red brick home in the upscale Hunter Mill Estates subdivision shortly before 5 a.m., police spokesman Eddy Azcarate said. The call was made by someone inside the home, which is on a tree-studded corner lot in the 1700 block of Raleigh Hill Road.

Azcarate said Kellermann’s body was found in the basement. There was no immediate information about whether he left a suicide note, or what may have prompted him to take his own life.

One of the questions surrounding this tragedy will obviously be whether Kellermann’s death had any connection to financial problems at Freddie Mac. No one knows yet, and there are few other details about what happened. For now, it’s just a very sad day.

As TWI reported recently, a ban on foreclosures by mortgage giants Fannie Mae and Freddie Mac ended for good on March 31, with no further extensions. But other lenders, from JPMorgan Chase to Citigroup, also had instituted voluntary freezes, and they are also now over. It all raises a question that TWI explored when some of the voluntary freezes began: Do foreclosure freezes really help homeowners, or just kick the problem down the road?

From The Journal:

Some mortgage companies had stopped foreclosing on borrowers as they waited for details of the Obama administration’s housing-rescue plan, announced in February, which provides incentives for mortgage companies and investors to reduce borrowers’ payments to affordable levels. Others had temporarily halted foreclosures while they put their own programs in place, or in response to changes in state laws.

Now, they have begun to determine which troubled borrowers are candidates for help, and to move the rest through the foreclosure process.

The resulting increase in the supply of foreclosed homes could further depress home prices and put additional pressure on bank earnings as troubled loans are written off.

Some of the mortgage companies are themselves receiving funds under the government’s financial-sector bailout, which could make their actions politically sensitive. But mortgage companies say they are taking steps to keep borrowers in their homes, and are only resorting to foreclosure when there are no other options.

Here’s what The Journal says regarding Fannie and Freddie:

Both Fannie and Freddie have stepped up sales of foreclosed properties since their moratoriums ended on March 31. Freddie says it has started to complete some foreclosure sales, such as those involving investment properties or second homes, though it continues to delay foreclosures on loans that may be eligible for modification under the Obama plan.

Fannie has told servicers that “a foreclosure sale may not occur on a Fannie Mae loan until the loan servicer verifies that the borrower is ineligible” for a loan modification under the Obama administration’s plan, “and all other foreclosure prevention alternatives have been exhausted,” a Fannie spokeswoman says.

I don’t see how this proves that Fannie and Freddie actually have stepped up foreclosures on most homeowners, though they may be moving forward on investment properties and second homes. Both Fannie and Freddie have a mandate to hold off on foreclosing until they can determine whether the homeowner qualifies for the Obama administration housing rescue plan.

If we suddenly see a huge flood of foreclosures ahead, and most involve Fannie and Freddie properties, it will be evidence that the Obama homeowner rescue plan isn’t enough to slow down the foreclosure machine. But it’s too early to draw that conclusion. While the foreclosure rate is clearly on the rise, it t remains to be seen how bad it all will get, and whether the foreclosure freezes really did much to keep troubled borrowers in their homes for good.

A ban on foreclosure sales and evictions from houses owned by mortgage giants Fannie Mae and Freddie Mac, which began as a high-profile effort just before the holidays to keep people in their homes as the government tried to come up with homeowner rescue plans, is over.

Spokesmen for Fannie Mae and Freddie Mac confirmed the ban ended March 31, in a response to an inquiry from TWI. The agencies made a major announcement in November to roll out the ban, garnering headlines and extensive news coverage. Freddie Mac CEO David Moffett issued a statement at the time, saying the ban “provides a new measure of certainty” to families facing foreclosures during the holidays.

Illustration by: Matt Mahurin

But its expiration didn’t seem to merit the same level of fanfare, with some housing advocates caught by surprise, scrambling for information today and Wednesday on listservs and in phone calls.

Danilo Pelletiere, research director for the National Low Income Housing Coalition, said the ban’s eventual expiration wasn’t unexpected – but it also wasn’t clear specifically when it was supposed to end. Some housing attorneys and advocates were confused because they were in the middle of cases that would be affected by the expiration. Fannie and Freddie have repeatedly extended the ban, which was originally expected to expire on Jan. 9.

Fannie Mae said in a brief statement from spokesman Brian Faith that “Fannie Mae’s suspension of foreclosure-related evictions concludes as of March 31, 2009. The company has in place special foreclosure sale requirements that take into account the Making Home Affordable program. A foreclosure sale may not occur on any Fannie Mae loan until the loan servicer verifies that the borrower is ineligible for a Home Affordable Modification and all other foreclosure prevention alternatives have been exhausted.”

Since the ban started, both Fannie and Freddie have developed rental programs to keep tenants from being evicted from foreclosed properties owned by the two agencies.

In addition, the Obama administration in March unveiled its plan to help troubled borrowers either refinance their homes or modify their mortgages.
Housing advocates aren’t exactly cheering about the ban being lifted. But they are hoping the new programs succeed, and plan to keep a close eye on their progress, Pelletiere said.

The lifting of the ban will be a testing ground for the administration’s approach to foreclosures. A bill to allow bankruptcy judges to modify mortgages has stalled in Congress. Money from the Troubled Assets Relief Program has gone to banks and bailout efforts. The ban, enacted as foreclosures soared and the holidays approached, was the government’s first dramatic step to help homeowners. The housing rescue plan was developed and announced only after the Treasury Department first unveiled its plan to buy toxic assets from banks.

“A perpetual moratorium is not a solution to how we do foreclosures in the future,” Pelletiere said. “It’s a holding pattern. We need to break that holding pattern to allow for something else positive to happen.”

Brad German, a spokesman for Freddie Mac, said he was “mystified” as to how anyone could be surprised by the ban’s expiration. The idea behind it was to give the government time to create homeowner rescue plans, and that’s been done, he said. Neither agency also expects a flood of homeowners out on the street because the ban is being lifted, he added.

“For all practical purposes, people will be in their homes for a while,” despite the ban’s expiration, German said. Fannie and Freddie will need time to approach tenants and homeowners and figure out whether they are qualified for help, he said.

Separate programs launched recently by Fannie and Freddie to allow tenants to stay in Real Estate Owned (REO) foreclosed properties owned by the agencies and lease them on a month by month basis at market rents, until they can be sold again, are not affected by the ban’s expiration, German said. Those programs will continue, with no expiration date scheduled. Fannie’s program covers renters of foreclosed properties, while both former owners and renters can qualify for Freddie’s program.

The REO rental programs aim to reach out to those no longer covered by the foreclosure ban and see if they can qualify, German said – which mitigates the effect of the ban being lifted. For example, under Freddie Mac’s program, a homeowner currently facing eviction could stay in his house as a renter until it is sold, if he meets the program’s guidelines.

But with little information to go on today, housing advocates found themselves in confusion and concern over whether the REO program was ending, and whether all renters would be subject to evictions again.

Even when the Fannie and Freddie ban was active, however, it sometimes failed to reach people before they got evicted, said Judith Liben, a senior housing attorney with the Massachusetts Law Reform Institute, a nonprofit legal services advocacy group. Only the District of Columbia and a few states have no-fault eviction laws requiring that a lease survives foreclosure, and that tenants can’t be automatically evicted. And the new REO policy by Fannie and Freddie, while laudable, takes time to reach the neighborhood level, Liben said.

Expanding no-fault eviction laws could be one answer to the problem of renters facing evictions, Liben said. Other states are moving to require more foreclosure notice for tenants.

The vulnerability of tenants to foreclosure evictions, along with falling property values of vacant and foreclosed homes, are prompting Liben and others to question the banking industry’s reluctance so far to move toward allowing people to stay in foreclosed houses and pay rent. Many are hoping the rest of the mortgage industry will follow Fannie and Freddie’s lead in establishing REO rental programs.

“Very few people have reached the stage where they are looking at renters as part of the solution,” Pelletiere said. “There’s almost a resistance to it. Bankers in particular still have this mindset that ‘I need to get those people out and sell the house right away.’ But rental housing really is part of the solution to this crisis.”

An oversupply of housing, combined with a weak economy that often requires people to move to find new jobs – and not tied down to a house they can’t sell – makes renting an especially worthwhile option, Pelletiere added. “Until the economy finds its footing, we don’t want to put pressure on people to settle down,” he said. “In the past we’ve had a very significant bias toward homeownership that has been to the detriment of rental housing. And that has to stop. Housing policy going forward really has to balance out a little more. In the long term, rental housing can be good for communities.”

Problems with bank-owned foreclosed properties that sell for way below market value, for example, could be addressed by keeping renters in the houses.

Community groups last month urged Congress to crack down on the practice of Broker Price Opinions , which are cheaper substitutes for full appraisals and are used to determine a property’s value. BPOs often are performed by real estate agents with minimal training and cost as little as $50, compared to $300 and above for a traditional appraisal. They are increasingly employed by lenders for sales of bank-owned foreclosed properties, known as REOs, or Real Estate Owned properties, and for short sales, in which owners sell their homes for less than they are worth. The bank forgives the difference, and takes a loss.

Using a BPO is illegal in more than 20 states, but the practice has become widespread, said David Berenbaum, executive vice president of the National Community Reinvestment Coalition. The BPOs frequently result in lowball estimates of a property’s value, with lenders using them to unload REOs and short sale properties. Agents who perform BPOs have an inherent conflict of interest, because they are working for lenders who want to quickly dispose of properties. Speculators and other investors scoop them up at the fire sale prices, dragging down property values overall.

“Right now, it’s a race to the bottom,” Berenbaum said. “They’re having a terrible impact on property values.”

Whether or not they use BPOs, banks increasingly are selling off REOs at low prices, even in stronger housing markets. In Temecula, Calif., for example, Citigroup sold a foreclosed house for just $139,000, when comparable houses in the area were going for $240,000 to $260,000, the North County Times reported – meaning the bank left some $100,000 on the table.

In markets where the REOs don’t sell and lenders fail to maintain their properties, other problems persist, with neighborhoods facing a glut of abandoned homes and blight, as TWI has explained. RealtyTrac, an online foreclosure database, predicts a record 1.5 million REOs this year, meaning more trouble ahead.

Given all this, some housing advocates can’t understand why lenders aren’t allowing more former homeowners or current tenants to pay rent and live in foreclosed houses until they can be sold. The new REO rental programs of Fannie Mae and Freddie Mac marked a major step toward that goal. But there’s been no major private industry initiative to move beyond the model of getting owners and tenants out ASAP, Berenbaum noted, despite the obvious benefits of doing so.

“Frankly, if the mortgage industry would allow homeowners facing foreclosure to remain in the properties as tenants, it would stabilize their investments and stabilize the communities,” Berenbaum said.

But bloated REO inventories are proof of how overwhelmed servicers and lenders due to record numbers of foreclosures – and they’ve said repeatedly they don’t want to be in the property management business. They also contend they’re not always the ones responsible for the vacant homes problem. In a magazine published by the Housing Wire mortgage blog, Robert Klein, CEO of Safeguard Properties, a major servicer, put it this way:

“The fact is, as an industry, mortgage servicers spend in excess of $2 billion annually to take care of vacant properties so they don’t become nuisances to neighbors and communities. Unfortunately, servicers who are the ‘good guys’ get lumped in with property flippers and Internet investors whose irresponsible practices have been major contributors to urban blight.”

Despite that blight, lenders and servicers seem to be closing their eyes to the possibility of economic benefits from filling empty houses with renters, said Liben said.
“I think that the mortgage industry and the banking industry are very slow to catch on to why things are different in this particular crisis,” Liben said. “They aren’t even trying to be creative. It’s like “This is the way we’ve always done it. Get people out and sell the house and get new people in and that’s that.’” Or, “We don’t want to be landlords.’” That’s all they ever say. ”

Foreclosed and vacant houses often lose 50 percent of their market value by the time they are sold out of bank REO inventories, Liben said. Those kind of losses should be spurring the industry to at least undertake a cost benefit analysis to figure out whether it might be more financially advantageous to rent out the properties, she said.
“Maybe those properties wouldn’t have declined by 50 percent if they had people in them,” Liben said.

Creating policies to encourage lenders to rent their foreclosed properties remains an uphill battle, said Dean Baker, co-director of the Center for Economic and Policy Research. The mortgage industry just isn’t interested in getting involved in the rental market. And some of the nonprofit development groups that overreached in promoting homeownership during the boom, putting people in houses they couldn’t afford, aren’t taking the lead on initiating rental options, he said.

“They don’t want to own up to what they did,” Baker said. “They’ve pretty much put their heads in the sand.”

Pelletiere, of the National Low Income Housing Coalition, said the rental issue remains a “tense” one for some nonprofits, because of the bitter controversy over whether the Community Reinvestment Act, an anti-redlining law, played a role in the housing crisis. Conservatives have blamed the CRA and poor and minority borrowers for the foreclosure crisis, saying the government forced lenders to make risky mortgages to them to meet CRA requirements.

Nonprofits fought that campaign by pointing out that most subprime loans were made by independent mortgage brokers and firms not covered by the CRA. Nonetheless, the belief persists, and nonprofits are wary of ceding any ground on the issue by changing their focus to promoting renting, Pelletiere said.

For the lending industry, the issue is far less complicated, Liben charged. The savings and loan crisis should have prepared them to better manage their REOs, she said. “They have no excuses,” she said. “They should have seen this coming.”

In the absence of industry initiatives, economists and housing experts have been floating various rental ideas, including allowing a delinquent homeowner to give the property back to the bank, in return for having his credit wiped clean. Rent-to-own programs, in which a portion of rent goes toward a downpayment, also are being revived in some communities with too many foreclosed homes.

But none of those efforts will gain a foothold until the mindset that renters are a detriment to a neighborhood begins to change, Pelletiere said. Or until renting is seen as one of the answers to the problem of foreclosures and vacant homes. For those reasons, he and others will watch closely as Fannie and Freddie run their REO rental programs, and try to keep people in their homes as a ban on foreclosure sales and evictions finally ends.

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From The Journal:

Fannie Mae is due to pay retention bonuses of between $470,000 and $611,000 this year to some executives, despite enormous losses at the government-backed mortgage company. Fannie’s main rival, Freddie Mac, also plans to pay such bonuses but hasn’t yet provided details.

Fannie’s bonuses are smaller than ones paid by American International Group Inc. that have caused a political firestorm for that company. Seventy-three AIG executives received retention payments of $1 million or more recently, according to New York Attorney General Andrew Cuomo.

But the Fannie bonuses are still considerable and come at a time when Fannie and Freddie are receiving increasing amounts of funding from the Treasury. For 2008, Fannie and Freddie reported combined losses of about $108 billion, largely stemming from a surge in home-mortgage defaults. The Treasury has agreed to provide as much as $200 billion of capital apiece to Fannie and Freddie in exchange for preferred stock. The two companies have said they will need a combined $60 billion of that money to cover their losses so far.

So, lose more than $100 billion, and your company fights to keep you! This is beyond absurd. I haven’t seen any reporting on whether these Fannie and Freddie executives have contracts requiring those payments. Regardless, they should follow the lead of some AIG executives and give the money back. It’s hard to call it merit pay, by any stretch of the imagination.

Or let’s put them on the spot. Send those Fannie and Freddie high achievers to California’s Inland Empire, or Detroit, and have them explain, in person, to a gathering of former homeowners who lost their properties to forceclosure, exactly why they deserve their big rewards.

Talking Points Memo’s Elana Schor picked up on the story and asked Rep. Barney Frank (D-Mass.), the chair of the House Banking Committee, if he would move to stop mortgage lenders from requiring borrowers to waive their legal rights in exchange for help restructuring their mortgages.

“I did not know until you just told me that Fannie and Freddie were [requiring mortgage holders to sign waivers],” Frank said during the interview. “And I can pretty much guarantee you that we will have put an end to that within a few days.”

Mary now reports that Fannie and Freddie have removed the waivers from their loan modification agreements. You can read her full story here.

Treasury Secretary Timothy Geithner and Rep. Barney Frank (D-Mass.) (WDCpix)

Now that Treasury Secretary Timothy Geithner has unveiled his bank rescue plan, the Obama administration says it will turn next to setting up a fast-track way to stop the foreclosure crisis with national standards for loan modifications. The new standards – which will expand on a program launched by the government late last year – won’t be announced for a week or two. But one thing appears settled: They aren’t going to require borrowers to give up some of their legal rights in order to qualify for a loan modification.

Waivers requiring homeowners to sign away their rights to sue, in order to get their loan payments restructured on more affordable terms, were included in a streamlined loan modification program started by mortgage giants Fannie Mae and Freddie Mac in December. TWI first reported that the waivers were part of the agreements, buried in a long list of requirements for a modification. These waivers could mean that borrowers would have to give up all legal claims related to their mortgage, not just to the loan modification, even in cases where the borrowers were victims of predatory lenders.

Illustration by: Matt Mahurin

Consumer groups and Rep. Barney Frank (D-Mass), the chairman of the House Financial Services Committee, were not aware that the waivers were included in the loan modification agreements until after TWI’s story ran on Jan. 15. The story was brought to Frank’s attention during an on-camera interview with Talking Points Memo reporter Elana Schor.

“I did not know until you just told me that Fannie and Freddie were [requiring mortgage holders to sign waivers],” Frank said in the interview. “And I can pretty much guarantee you that we will have put an end to that within a few days.

Since then, the waivers have been eliminated, said Brad German, a spokesman for Freddie Mac. Fannie Mae spokesperson Amy Bonitatibus also confirmed the waivers have been removed. New sample modification agreements – without the waivers – were posted on Freddie Mac’s website during the last week of January, German said. Both Fannie and Freddie use the same agreements.

The timing of their removal is important. As the Obama administration prepares national standards for loan modifications, it will offer a “more aggressive version” of the Fannie Mae and Freddie Mac program, James Lockhart, director of the Federal Housing Finance Agency, told the Washington Post. Lockhart’s agency regulates Fannie and Freddie.

The details of the standards still are being worked out. But with the waivers removed from the current Fannie and Freddie loan modification agreements, consumer advocates don’t expect to see them show up in any national standards either, they said.

“We’re certainly glad to see them gone,” said Julia Gordon, senior policy counsel for the Center for Responsible Lending, a research group that fights foreclosures and predatory lending. “We don’t have any idea yet what the new program is going to look like, but it seems to me the point has been made regarding those waivers.”

But, she said, her group will keep a close watch, to make sure the waivers don’t resurface.

Elizabeth Renuart, an attorney with the National Consumer Law Center who focuses on predatory lending issues, called the removal of the waivers “good news for homeowners.”

“They will not waive their rights to later defend themselves if the servicer violates the loan modification agreement itself, or if the servicer attempts to foreclose on a loan involving predatory conduct on the part of the lender – and those it may have been in cahoots with, a broker or appraiser,” she said.

What bothered Renuart, and others, was that many homeowners probably wouldn’t have understood what they were signing away, in order to get their loans modified. And with the Obama administration expected to aggressively expand loan modifications, many more borrowers might have done just that, if the waivers still were being used.

“Most homeowners who can obtain loan modifications from servicers usually will do so without the help of a lawyer–so waivers of rights to sue, defend themselves in a foreclosure, or to a jury trial–are particularly pernicious in this circumstance since most homeowners will not understand the consequences of such clauses,” Renuart said.

“By taking out waivers from their form agreements, Fannie Mae and Freddie Mac join the FDIC in leading the way in establishing a fair process that the remainder of the industry should feel pressured to follow,” she added.

The agencies decided themselves to remove the waivers, their spokespersons said.

“We understood that there was concern about some of the standard language in our modification documents so we removed the language,” Bonitatibus said.
Neither she nor German would comment further.

During hearings before his committee, last summer, Frank angrily denounced the practice of using waivers, and told private lenders, like Bank of America, to end it. Gordon testified then that the existence of the waivers was one of the roadblocks to getting more loan modifications done. In a dramatic confrontation, a representative for Countrywide Financial Corp. denied using the waivers, until Gordon produced one from her briefcase. The attorney said the practice was under review, and Frank replied that the bank should put it “six feet under” review.

Kathleen Engel, a law professor at the Cleveland-Marshall University School of Law who studies predatory lending, said there was a certain irony to the government including waivers in loan modification agreements. Part of the reason why some borrowers ended up with predatory loans was that they didn’t understand all the paperwork they were signing from the lenders. Including the waivers in Fannie and Freddie agreements set borrowers up in the same unfortunate situation, only with the government as the responsible party.

“If you think about it, some borrowers got into these bad situations because someone lied to them about the loan they were taking out,” Engel said. “But it’s pretty impossible for them to get relief if they’ve signed the waiver.”

During a stop on Tuesday in Florida, where foreclosures are soaring, Obama said that he will personally announce the new foreclosure aid program, within a few weeks. Whatever the details, consumer advocates are expecting that some of the new help for homeowners will be no reappearance of waivers that require them to sign their rights away.