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Borrowers to Keep Legal Rights Under Foreclosure Plan

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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.

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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.

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