By Joe Light
Investors who take over delinquent mortgages backed by Fannie
Mae and Freddie Mac must try harder to reach agreements that let
borrowers keep their homes before kicking them out, according to a
new set of rules released Monday. The rules could limit
foreclosures but also could cost taxpayers money.
The rules from the Federal Housing Finance Agency require
investors to consider extending loan terms, forbearing or forgiving
mortgage principal, or pursuing a short sale before foreclosure.
When an investor does foreclose, for the first 20 days after the
property is marketed, the investor can consider selling the
property only to nonprofit groups or to people who intend to live
in the house, rather than to other investors.
Fannie and Freddie don't make mortgages but buy them from
lenders, wrap them into securities and guarantee to make investors
whole if the mortgages default. When a default occurs, Fannie and
Freddie try to mitigate their losses through getting a borrower to
pay again or, eventually, through foreclosing upon the
property.
Because such a process can take years and is expensive, both
companies have lately considered selling the nonperforming loans to
investors who would go through the process themselves. Loan buyers
also have the flexibility to take drastic steps to keep homeowners
in place, such as by cutting mortgage principal balances, which
Fannie and Freddie are largely prohibited from doing. The companies
are taking their cue in part from the U.S. Department of Housing
and Urban Development, which has held auctions of nonperforming
loans backed by the Federal Housing Administration for several
years. Nonprofits have criticized some of those auctions.
The rules represent a nod to housing advocates who have long
complained that some investors have treated homeowners roughly
after buying loans formerly owned by the government. Some advocates
had asked for the rules in response to what they said were
anecdotal reports of ill treatment from some investors who bought
the homes.
However, some investors say that they generally follow the
practices outlined by the regulator already, and that to the extent
the rules make them go through extra steps, it could result in
lower prices for the loans, and steeper taxpayer losses.
The FHFA's rules essentially seek to ensure that investors who
buy the loans make several attempts to keep borrowers in their
homes before foreclosing.
"These guidelines are a great step toward ensuring that the
auctions are more responsible and have the potential to benefit
homeowners and neighborhoods," said Sarah Edelman, a senior policy
analyst at the left-leaning Center for American Progress.
"FHFA expects that with these enhanced requirements,
[nonperforming loan] sales by Freddie Mac and Fannie Mae will
result in more favorable outcomes for borrowers and local
communities, while also reducing losses to the Enterprises and,
therefore, to taxpayers," said FHFA Director Melvin Watt in a
statement.
The rules come as Fannie's and Freddie's auctions get under way.
Freddie has held auctions for loans with around $1 billion in
unpaid principal. Fannie executives have said they're considering
auctions but haven't yet had one.
"The problem is, what's the purpose of changing the rules
midstream? The goal of an investor when he buys a nonperforming
loan is already to make it perform," said Vincent Fiorillo,
president of the board of the Association of Mortgage Investors and
an executive at DoubleLine Capital.
Mr. Fiorillo said that investors would have to see the specifics
of the next Fannie or Freddie loan auctions before knowing whether
the rules would hurt prices.
New Jersey Community Capital, a nonprofit group that has
purchased several hundred FHA-backed loans, said that it took a
look at Freddie's recent auction but ultimately couldn't put
together a bid.
Among the constraints, Freddie's bidding window--at two
weeks--wasn't enough time for the nonprofit to inspect the
properties or figure out where to get financing, said Peter Grof,
deputy to the president at NJCC.
The size of the pools so far, at several hundred million
dollars, have also been hard for nonprofits to swallow, he
said.
Write to Joe Light at joe.light@wsj.com
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