Opinion

Fault Fannie, Freddie

Fannie Mae and Freddie Mac, the government-run mortgage giants, share much of the blame for the foreclosure crisis.

Fannie and Freddie own or guarantee $5.5 trillion of mortgages — more than half of all US home mortgages. Major banks — Bank of America, Wells Fargo, Citigroup and JP Morgan Chase — service the loans for Fannie and Freddie for fees. And when they do, they do what Fannie and Freddie tell them to do.

To that end, Fannie and Freddie have long issued “Servicing Guides.” Fannie’s latest update (Aug. 31) noted that Fannie “has established time frames within which routine foreclosure proceedings are to be completed.” It warns that Fannie “reserves the right to impose a compensatory fee” on banks that don’t meet the guidelines.

The update perpetuates Fannie’s longstanding, specific deadlines for exactly how long banks have to complete foreclosures on a state-by-state basis: 185 days in Florida; 300 days in upstate New York and 420 days downstate, etc. In states where foreclosures don’t have to go through the courts, Fannie imposes much tighter time frames: 150 days in Nevada and just 90 days in Maryland.

And for years, Fannie has also controlled which law firms do the legal work. It publishes a “Retained Attorney List” specifying the names and contact information of the lawyers the banks can hire to bring foreclosures.

Fannie’s list for New York (also updated as recently as Aug. 31) includes Steven J. Baum PC — a firm now being described as a “foreclosure mill.” Last month, Baum’s firm (and others) became the subject of a class-action suit in New York federal court, alleging various abuses.

Following a Sept. 24 letter signed by former Fannie champion Rep. Barney Frank (D-Mass.) and two Florida Democrats (Reps. Alan Grayson and Corrine Brown) to Fannie’s CEO challenging the use of foreclosure mills, Fannie ditched the embattled Florida firm run by David J. Stern.

To recap: Major banks servicing loans for Fannie and Freddie, under specific written orders from the government-run mortgage giants, hired foreclosure mills because they were on approved-attorney lists published by Fannie. The banks pushed the lawyers to process the foreclosures very quickly because Fannie and Freddie insisted on it.

And, we now know, some of those lawyers — fearful of losing millions in their own fees if they didn’t meet the deadlines — cut corners and filed all kinds of questionable court papers.

So why, a few weeks before the midterm elections, has the FBI announced an investigation into the financial industry for possible criminal violations in all this?

I’m not saying banks aren’t committing some infractions over mortgages they own themselves, or that foreclosure-mill abuses should be excused because lawyers were trying to comply with a Fannie or Freddie deadlines. But let’s not let big-government activists convince us to let them “save” us from (yet another) problem that they played a huge role in creating.

Thursday, Fannie and Freddie’s federal regulator, the Federal Housing Finance Agency, issued a statement estimating that the cost to the taxpayers of bailing out the mortgage giants could rise from its current level of $148 billion to $363 billion by the end of 2013. (Sadly, I’d bet the “over” on that one).

The once-stockholder-owned mortgage giants have been wards of the state for more than two years. Fannie and Freddie execs answer directly to President Obama — he even has to OK their multimillion-dollar bonuses.

Obama certainly didn’t let Tony Hayward, then BP’s CEO, get away with denying personal knowledge of problems with the Gulf Oil spill. Shouldn’t our president be held to the same standard?

Stephen B. Meister is a partner of Meister, Seelig & Fein LLP.