When the government announced in November that it would use mortgage giants Fannie Mae and Freddie Mac to streamline loan modifications for possibly hundreds of thousands of borrowers, officials billed the idea as a fast-track program to fight foreclosures. What no one mentioned is that homeowners would have to sign away their rights to sue, if they wanted to get those loans modified.
The waiver of legal rights is buried among a long list of requirements in loan modification agreements for delinquent borrowers seeking more affordable loans under the new loan program, which began on Dec. 15. Some experts say the waivers are problematic, because they could require a homeowner to give up all legal claims related to their mortgage, not just to the loan modification. And some consumer advocates were unaware of its inclusion until notified by TWI. They plan to bring the waivers to the attention of House Financial Services Chairman Barney Frank (D-Mass.), who has been trying to stop private lenders from using such waivers.
“I’m a little shocked by this, frankly,” said Julia Gordon, senior policy counsel for the Center for Responsible Lending, a research and policy organization that fights abusive financial practices and has pushed for more loan modifications. “I’m going to do my best to get rid of it.”
Fannie Mae and Freddie Mac together own or guarantee some 31 million mortgages, or about 58 percent of all single family home loans. Both announced a foreclosure eviction freeze over the holidays to give the streamlining plan a chance to work. The freeze was set to expire on Jan. 9, but was extended to Jan. 31.
Under the program, high-risk borrowers at least three payments behind in their mortgages are eligible for the modifications. Servicers get paid $800 for each modification as well.
But also included in the Fannie agreement is a provision stating that “borrower has no right of set off or counterclaim or any defense to the obligations of the Note or Security Instrument.” The waiver is part of the borrower requirements that must be signed for the loan modification. Fannie Mae’s sample version is available on one of its websites; the Freddie Mac agreement, which has similar language, can be accessed only by servicers. The agreements were designed by Fannie and Freddie.
In plain English, the waivers mean a borrower can’t sue the lender who originated the mortgage if the loan modification goes bad, or for any other lending abuses concerning their loan, Gordon said. Such waivers are regularly required in the settlement of class action suits, but they haven’t been included as a matter of course in individual loan modifications agreements until lately. “I find this outrageous,” she said.
Gordon’s not the only one. Forcing borrowers to sign away their legal rights to sue in order to get loan modifications became an issue this summer, when Frank angrily denounced the practice at a House Financial Services Committee hearing. Frank also told servicers to stop using the waivers. The hearing was called to find out why more loan modifications weren’t getting done and to look at the role of mortgage servicers in the foreclosure crisis. Some advocates cited the increasing use of waivers by servicers and major lenders such as Countrywide as one of the problems.
At the hearing, Gordon testified that “in many cases, voluntary loan modifications or workouts are further disadvantaging homeowners in trouble because the servicer forces homeowners to waive all their rights, even those unrelated to the workouts.” And Gordon said, servicers and lenders were misusing the waivers:
In many cases, homeowners are being asked to permanently sign away their rights to all past, present, and future legal claims, including foreclosure defenses, even when the modifications or workouts are temporary and/or unsustainable… Given that these waivers are typically signed when a family’s only other choice is to lose their home, and given that they are required not just for life-of-the-loan modifications but even for temporary forbearances, we believe they risk compounding the foreclosure crisis.
Fannie Mae and Freddie Mac, however, offered a different interpretation of the waivers. Representatives for both companies said the waivers are nothing more than standard legal language, intended to protect the legal rights of the two mortgage entities while enabling loan modifications to get done.
“It allows for loan modifications to go through without our waiving our rights to collect interest fees or other expenses, and to protect ourselves from litigation,” Freddie Mac spokesman Brad German said. He declined further comment.
But Gordon disagreed, saying the waivers go further: “As written, this broad waiver appears to encompass all claims and defenses related to any aspect of the mortgage, including its origination,” she said.” It is unfair and inappropriate for Fannie and Freddie to require a homeowner to waive all of their legal claims related to a mortgage just to get a loan modification. If Fannie/Freddie intend the waiver to be limited only to litigation related to the loan modification – which we do not oppose — they will need to write the clause differently.”
The regulator for the two agencies, the Federal Home Financing Agency, did not respond to a request for comment.
Consumer and housing advocates say they oppose waivers because the workouts presented to borrowers may only be a temporary solution. Other workouts may raise the monthly payments rather than lower them, or may inevitably fail, said Elizabeth Renuart, an attorney with the National Consumer Law Center in Boston who focuses on predatory lending issues. Borrowers who find out their original loan terms were abusive or fraudulent may have no recourse if they are forced to sign away their legal rights, Renuart said. They could face foreclosure, with no way to fight it.
“It means consumers are being stripped of their ability to protect themselves in a foreclosure,” said Renuart. “What if the loan modification fails?”
She also said the requirement presents a double standard, in that banks received billions of dollars of government bailout money under the Troubled Assets Relief Program without any assessment of their responsibility in the selling of predatory or fraudulent loans or mortgages borrowers couldn’t afford.
“It’s saying to consumers, ‘This is your last chance and you can’t protect yourself if what is offered doesn’t work,’” she said. “But banks get billions of dollars in help and get their slate wiped clean.”
The fact that two government controlled agencies are requiring the waiver is particularly egregious, said Dean Baker, co-director of the Center for Economic Policy and Research. The government seized Fannie and Freddie in September in a move that could cost taxpayers billions of dollars. It means a government-controlled entity could be limiting the legal rights of borrowers who are paying for its bailout. The waiver appears aimed at Wall Street, rather than borrowers, Baker said.
“And if it’s a carrot for servicers to participate in the program, it’s an outrageous carrot,” Baker added.
Requiring borrowers to waive their legal rights in order to get loans modified has become an increasingly popular tactic as the housing crisis has worsened, said Ira Rheingold, executive director of the National Association of Consumer Advocates. He said consumer attorneys regularly advise clients not to sign modification agreements with waivers, or to cross out the waivers first.
During the subprime mortgage boom, lenders were “really, really good” at stopping people from suing them over abusive or predatory loans, Rheingold said. Putting in the waiver is a continuation of that approach, he said.
“It wasn’t invented by Fannie and Freddie,” Rheingold said. “I’m not surprised it’s in there, but I’m disappointed. It’s a real issue. The government shouldn’t be asking people to waive their rights to claims.”
The most vocal opponent of the tactic has been Frank. Gordon said the July hearing featured a dramatic confrontation, in which Countrywide representatives denied requiring the waivers – until Gordon produced a copy of one from her briefcase. The lenders said they would put the waivers under review. Frank told them to put the waivers “six feet under” review, and to end the practice.