The Federal Housing Finance Agency (FHFA) recently changed its policy regarding buyback of REO properties through Fannie Mae and Freddie Mac, but Massachusetts Attorney General Martha Coakley thinks the agency could do more.
Coakley sued the GSEs in June, claiming their refusal to engage in foreclosure buyback programs was a violation of Massachusetts' foreclosure prevention law. The suit was dismissed and Coakley is considering making an appeal; however, many viewed the recent FHFA policy changes as a partial victory for Coakley.
In a letter to FHFA Director Mel Watt dated December 8, Coakley praised the changes announced by the agency that went into effect in late November allowing a former homeowner, or a third party representing that homeowner, to buy back his or her house following a foreclosure at fair market value instead of the entire amount on the mortgage. But Coakley also spelled out three ways in which she thought the agency could further improve its buyback policy.
"We are pleased that FHFA now has agreed to reverse in part its position regarding buyback programs that were a major component of our lawsuit. We are considering this development as we weigh our options for appeal in that case," Coakley wrote in her letter. "Because of this policy change, numerous families in Massachusetts will no longer face eviction at the hands of the GSEs, but will instead be able to repurchase their homes at the market rate. This policy change also makes financial sense for the GSEs, as they will recoup at least the property's current market value, yet they will avoid the cost of owning, maintaining and marketing these REO properties, as well as the cost incurred by suing to evict families from their former homes. By any measure, this is an outcome that benefits all stakeholders: the GSEs, the affected families, and the communities in which they live. As encouraged as we are by this policy change, we believe it does not go far enough."
First, Coakley said the policy should cover a larger inventory of houses. The changes announced applied only to the GSEs' existing inventory (as of November 25, 2014) of single-family REO properties, which currently totals about 121,000. The policy change does not apply to homes on which the foreclosure process began after November 25, 2014.
Second, Coakley encouraged the FHFA to include pre-foreclosure sales, or short sales (sales in which the buyer pays less than the outstanding mortgage balance for the home) in its buyback policy.
"There is no principled reason to limit the new policy to sales of REO properties," Coakley wrote. "Instead, the opposite is true: in a short sale, the GSEs avoid the cost of foreclosure altogether, which is also an enormous benefit to the homeowner and surrounding community."
Third, Coakley urged the FHFA in her letter to re-evaluate its policies on principal reductions to mortgage loans, saying that this could be used as an effective anti-foreclosure tool.
"A loan that is modified such that the borrower can afford to stay in the home and continue paying the modified loan is generally more financially advantageous for lenders and investors when compared to foreclosure," Coakley wrote. "As such, the adoption of principal reduction represents a financial benefit to the GSEs, while also stabilizing families and neighborhoods."