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Freddie shares its foreclosure fears

Nov 03, 2010

The foreclosure follies are turning into quite a headache for Freddie Mac, the taxpayer-owned mortgage investor.

So says a look at Freddie’s quarterly report filed Wednesday with regulators.

The entire “risk factors” section of the report comprises a 1,351-word explanation of how “deficiencies in foreclosure documentation” could raise costs, make business harder to plan and otherwise throw a wrench into what already is far from a smooth-running machine.

Last quarter, if you can remember back that far, all the risks were tied to the universally beloved Dodd Frank Act.

“The integrity of the foreclosure process is critical to our business, and our financial results could be adversely affected by deficiencies in the conduct of that process,” Freddie says in  Wednesday's filing.

The terms “integrity” and “foreclosure process” don’t exactly go hand in hand nowadays, what with Bank of America and Ally and Wells Fargo all sort of having admitted improprieties, by their decision to resubmit tens of thousands of documents to courts.

But Freddie, which like its big sister Fannie Mae has been majority owned by taxpayers since its September 2008 takeover by Treasury, isn’t discouraged by the bad press. It said it is working with mortgage servicers to identify problematic practices, such as the one where big banks had people signing scores of foreclosure affidavits without actually reading them.

Freddie says probes of foreclosure practices and the accompanying foreclosure-sale suspensions “could prolong the foreclosure process nationwide and may delay sales of our REO properties.”

That wouldn’t be a welcome delay, given the rate at which the foreclosures are piling up on Freddie’s lots. The bank’s inventory of real estate owned rose 82% from a year ago in the third quarter, and drawing out the process of turning those houses around is not a development the company looks forward to:

Any delays in the foreclosure process could cause properties awaiting foreclosure to deteriorate until we acquire ownership of them through foreclosure. Such deterioration would increase our expenses to repair and maintain the properties when we do acquire them.

There are also questions about the size of the legal costs coming down the road as all this gets worked out, and about the degree to which Freddie’s partners in the securitization and mortgage messes will hold up their end of the bargain.

We will face increased expenses related to deficiencies in foreclosure practices and the costs of curing them, which may be significant. These costs will include expenses to remediate issues relating to practices of certain legal counsel that will increase our expenses in future periods. We may also incur costs if we become involved in litigation or investigations relating to these issues. While we believe that our seller/servicers would be in violation of their servicing contracts with us to the extent that they improperly executed documents in foreclosure or bankruptcy proceedings, as such contracts require that foreclosure proceedings be conducted in accordance with applicable law, it may be difficult, expensive, and time consuming for us to enforce our contractual rights.

It would be nice as taxpayers to get stuck with that particular bill, wouldn't it? And last but not least, there is the fact that the banks have yet to even figure out how big their problems really are, let alone own up to any of it.

It has been difficult for us to determine the potential scope of these issues, in part because we must rely on our seller/servicers for much of the pertinent information and these companies have not yet completed their assessments of these issues. Our evaluation of these issues, as well as the evaluations made by the seller/servicers, is complicated by the fact that state law governs the foreclosure process and, thus, the laws and regulations of a large number of different states must be examined.

After all this, you might wonder if Freddie and the banks will ever be able to get along again. That question may yet become less pressing, what with the Republicans taking over the House and brandishing empty promises to burn the whole GSE thing down, but for now it occupies a certain amount of Freddie Mac’s energy.

Our efforts to enforce our contractual rights may negatively impact our relationships with these seller/servicers, some of which are among our largest sources of mortgage loans.

Well, of course. Anyone would flinch at negatively impacting what has been such a fabulously productive relationship.

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