Straightening Out the LA Times, Fannie, Freddie, Strategic Defaults and Deficiency Judgments
Last week, the LA Times ran a story: “Fannie Mae, Freddie Mac to go after more strategic defaulters,â€ť with a subhead that read: â€śThe Federal Housing Finance Agency is pushing Fannie and Freddie to chase down borrowers who can make home loan payments but choose not to.â€ťÂ I saw the story, shook my head and decided to ignore it.
Then I read a couple of lawyers that I happen to know, came out in response to the article by explaining that California and Washington were non-judicial foreclosure states and therefore there could be no deficiency judgments to pursueâ€¦ which I have to admit, without having read the LA Times article, I found to be as irrelevant as it was obvious.
Then I read the LA Times article, something I really didnâ€™t want to do, but luckily the convoluted and yet banal nature of the thought process involved was readily identifiable within the first few paragraphs.
Writing for the LA Times this time out was Lew Sichelman, whose ability to remain oblivious to his interweaving of unrelated facts throughout the article was truly something to behold.Â At one point he nonsensically says, â€śGoing after strategic defaulters is big money,â€ť a reference to the inspector generalâ€™s office apparently criticizing Freddie Mac for leaving â€śbillions on the table.â€ť
What was the inspector general referring to when referencing a table with billions left upon it?Â Why, abandoned deficiency judgments, of course.Â What does that have to do with strategic defaults?Â Iâ€™m not at all sure, but before this discussion gets any goofier, we had better return to the beginning, because if we continue on that path as laid out for us by Mr. Sichelman, we are likely to become disorientated to the point that someone may actually fall down and hit his or her head on the hard floor.Â And when I say someone, Iâ€™m referring of course to me.
Okay, so there are a couple of things going on here.
One is Fannieâ€™s and Freddieâ€™s well-known predilection with the idea of someone strategically defaulting on his or her mortgage, which is the sort of thing that, should it occur in any number, might screw up Fannieâ€™s forecasts for future defaults as presented by former czar of the FHFA, Ed DeMarco, any number of times last year as part of his defense of the agencyâ€™s indefensible position on principal reductions.
In other words, too many defaults, strategic or otherwise, would make it apparent that perhaps a principal reduction or two would have prevented defaults and saved taxpayers moneyâ€¦ perish the thought.
Back in September of 2012, Ed â€śItâ€™s the Principalâ€ť DeMarco, managed to do what I had previously not considered possible, when he offended me more than he already had by announcing that his Office of the Inspector General 45-person staff of investigators and prosecutors, would be pursuing, seeking to criminally prosecute and perhaps even jail those who would dare to walk away from loans owned by Fannie or Freddie.
The Director of Rampant Idiocy at the FHFA, which would be my choice for a title to go along with that position, was Heath Wolfe, the assistant inspector general for audits at the OIG.Â At the time, Heath was certain that some unidentified cabal of mortgage scofflaws owed Fannie and Freddie more than $1 billion as a result of implementing their diabolical default strategery.Â Â And at the time I remarked that I would very much like to see his scratch paper so I could follow the math involved in his calculations, because otherwise my guess would be that he was doodling circles and accidentally ended up with $1 billion worth of zeros.
The Chicago Tribune, which covered the psychotic story, had the following to sayâ€¦
â€śNo one knows for certain how many borrowers fit the rather amorphous strategic defaulter mold. But credit repository Experian estimates that 20 percent of all foreclosures are the result of walkaways, people who could afford to make their payments but who decided not to.â€ť
Experian estimating 20 percent of defaults as strategic can only lead one to estimate that 90 percent of the executives at Experian are not too tightly wrapped, and the other 10 percent are adults with special needs.
The FHFA, in all its bravado, came right out in a bright yellow sundress and threatened the nameless, faceless and apparently now loan-less borrowers, sayingâ€¦
â€śâ€¦ if you are a â€śstrategic defaulterâ€ť who decided it was better to walk away from your obligation than to keep paying for a house that was worth substantially less than you owed, itâ€™s time to start looking over your shoulder.â€ť
Yeah, because Ed DeMarcoâ€™s team of 45 government employees are hot on your trail?Â And theyâ€™ll be coming to your hometown when?Â Sometime in 2076, would be my best guess, and that assumes they get out of New Jersey alive.
Herr Wolfe went on to sayâ€¦
â€śWe are working with Fannie and Freddie to build a mechanismâ€ť to identify strategic defaulters, Wolfe said at a recent mortgage industry conference. So if you walked away from one property and bought another, chances are fairly good that the OIG is going to find you.
Who conceived of this plan?Â Was it the same people who came up with the OCCâ€™s Independent Foreclosure Review?Â Because itâ€™s chocked full of all the stupidity weâ€™ve come to expect from our banking regulators, but with a travel budget too.Â This crack team of government accountants is out to prove that I could have afforded my loan at the time I walked away from paying it?Â Theyâ€™re developing a mechanism for detecting such an act?Â What sort of a mechanismâ€¦ is it some sort of probe that gets inserted into someoneâ€™sâ€¦ never mind.
I donâ€™t know what Madame Wolfe had in mind, but Iâ€™m thinking heâ€™s going to be mighty disappointed when I take the stand to testify that at the time of my default, although it may have appeared that I could have afforded to pay my mortgage payments, I was actually nursing a wicked drug and alcohol addiction, and all my excess cash was being invested in 18 year-old scotch, which I needed to wash down the kilos of cocaine I was doing.
Hey, leave me aloneâ€¦ itâ€™s a disease.Â Besides, Iâ€™m recovering and canâ€™t remember much of anything from those days.Â Motherâ€¦ is that you?Â
The FHFA went on to explain that if you â€śconvenientlyâ€ť omitted the fact that you had an outstanding mortgage you failed to pay on the application for your next mortgage, you committed mortgage fraud and could end up in jail.
â€śWhat are you in for, Sneakers?â€ť
â€śMemory lapse.Â Forgot to list something on a loan app.â€ťÂ
The government goons also talked about homeowners living on the governmentâ€™s dime, remaining in homes for years without paying.
â€śIn some cases, they remained in their houses for months or even years, living free on the governmentâ€™s dime â€” and yours and mine â€” before moving on. In other instances, they profited handsomely by renting their properties to unsuspecting tenants, collecting rent for many months but never paying lenders.â€ť
Hereâ€™s the deal, Heath-Barâ€¦ if your servicer takes three or more years to foreclose on a home, and the owner lives there until they finally do, how is that â€śliving on the governmentâ€™s dime?â€ť Â Hereâ€™s an ideaâ€¦ foreclose faster and people will move faster, howâ€™s that?Â And as far as paying rent to lazy lenders, why should the lenders get the rentâ€¦ what have they done to deserve rent?
Neither Fannie, nor Freddie will allow anyone to rent post-foreclosure, so Iâ€™d say theyâ€™re the last organizations that should be receiving rents under any circumstances.Â If you canâ€™t get your act together in less than three years to foreclose and evict someone who isnâ€™t paying, then you hardly deserve money for your utter incompetence.
Anyway, I was kind of looking forward to following the 45 New Keystone Cops around the country as they made fools of themselves, trying to put people in jail by claiming that they could afford something they say they couldnâ€™t, but as I might of suspected would be the case, itâ€™s not clear that they ever made it outside the beltway.
Keep in mind, Fannie and Freddie are too afraid of even foreclosing in their own names, they make servicers do the dirty work instead.Â But, now theyâ€™ve supposedly got their own beat cops that are coming to a theater near you to lock you up for claiming you canâ€™t afford your mortgage payment after they refused to modify your loan, and dual tracked you directly into foreclosure?
Let me know when that happens, okay?Â Iâ€™ll rush right over to take a picture of Fannieâ€™s or Freddieâ€™s newly bought set of testicles.
Ever since 2009, weâ€™ve been reliving this scary bedtime story about rich people walking away from their mortgages because theyâ€™re underwater, which by the way is an entirely logical and legal things to do.Â Just the threats made me wish Fannie or Freddie owned my loan, so that I could have flown to DC and hand delivered the keys to the office the strategic defaultâ€¦ also known as the Detector General.
Okay, so enough merriment.Â Even clowns get tiresome after a while.
Thereâ€™s something deficient around hereâ€¦
The second point the LA Times story was struggling to regurgitate had to do with deficiency judgments, the amounts left over after homes have been repossessed and sold at auction in judicial foreclosure states.Â Apparently, neither Fannie nor Freddie had been going after the ex-homeowners who legally would owe these leftover amounts.
According to the OIGâ€™s report being referenced by the LA Times, Freddie Mac failed to â€śrefer nearly 58,000 foreclosures with estimated deficiencies of some $4.6 billion for collection by its vendors.â€ť
Weâ€™ll get back to that in a moment, but meanwhile check this outâ€¦ talking about Freddieâ€¦
â€śAs of December, the big secondary mortgage market company had nearly 50,000 foreclosures still on its books, carrying a value of some $4.3 billion. And as of March 31, it held 364,000 mortgages that were 60 days or more delinquent and were, therefore, likely foreclosure candidates.â€ť
And then, like icing on a cake for my birthdayâ€¦
â€śFannie Mae’s portfolio of troubled assets is much larger. At the end of last year, it owned more than 105,000 foreclosed properties valued at $9.5 billion and carried a “substantial” shadow inventory of 576,000 seriously delinquent mortgages that were 90 days late or more and likely to end up in foreclosure.â€ť
Fannie, the OIG claimed, had failed to take action related to deficiencies on 30,000 foreclosures prior to the statute of limitations running out, and also failed to pursue deficiencies on an additional 15,000 borrowers that had already been reviewed and presumably had been approved for further raping by its vendors.
Are you digging the numbers being bandied about here?Â Forget the deficiencies, who cares about thoseâ€¦ I just did some quick math in my head and it appears that between the two GSE sisters, there are 1.1 million foreclosed properties relegated to the Island of Misfit Homes, just sitting around waiting to be adopted by another family at a fraction of their last loaned amount.
But, none of these homes had loans that could have been modified, is that what Iâ€™m to believe here?Â None out of 1.1 million could have been modifiedâ€¦ in any way?Â Rented back to the owner?Â Nothing would have been better than having them just sit around for a few years gathering mold?
Horsepucky.Â Save your PowerPoint slides and sell that somewhere else, Ed.
So, why arenâ€™t Fannie or Freddie going after deficiency judgments in judicial foreclosure states?Â Hmmmâ€¦ maybe because theyâ€™re simply being compassionate, and Iâ€™m 7â€™2â€ť and playing in the NBA.
Are they being lazy?Â No, not a chance.Â These are the same people whoâ€™ve come up with their own 1200 and 900 page books of servicing guidelines, respectively, because each needs to make their own books of rules.Â The same folks who will send crews to empty homes before those still living in them have returned from a trip to the market on Sunday afternoon.
So, what explains Fannieâ€™s or Freddieâ€™s apparent penchant for leaving billions on tables all over town?Â Well, letâ€™s seeâ€¦ my first guess would have to be that they didnâ€™t want to spend money on lawyers suing people who had no money.Â That certainly would beâ€¦ whatâ€™s the word Iâ€™m looking for hereâ€¦ oh yeahâ€¦ rational.
Of course, that reasoning does sort of play havoc with the whole â€śstrategic defaultâ€ť entanglement, does it not?Â I mean, either they have money, or they donâ€™tâ€¦ right?Â And if they did have money, why couldnâ€™t their loans have been modified?Â Oh, thatâ€™s rightâ€¦ I rememberâ€¦ because they were underwater and no principal reductions could be granted becauseâ€¦ waitâ€¦ why was that again?
Because principal reductions wouldnâ€™t prevent loans from defaulting, thatâ€™s what DeMarco said, no?Â So, these people must not have had any money, which would explain why no one wanted to sue them for a deficiency, which means they didnâ€™t strategically default, they were just tactically busted.Â You canâ€™t have it both ways, Eddie Monster.
Either the homeowners inn question had extra dough, in which case their defaults could have been prevented and Fannie or Freddie blew it for investors, or they didnâ€™t, in which case there was no point in pursuing them for the deficiencies.
So, which was it Edwardo?
Of course, I suppose it could be the result of Fannieâ€™s and Freddieâ€™s fear of coming out into the light and being seen for the evil and uncaring, though taxpayer supported, bribing behemoths they most assuredly areâ€¦ could that be whatâ€™s going on here?
It could beâ€¦ the GSEs are, after all, as inexorable as they are timorous when it comes to leaving their own homes during daylight.Â Itâ€™s quite possible that they couldnâ€™t find a servicer to do their dirty work for them this time around, and with law firms like Sternâ€™s and Baumâ€™s scattered to the wind, perhaps they couldnâ€™t find the right patsy for their petty pursuits.
Of course, going after the deficiencies would have the potential to bring to light the issue of why, if the homeowner had money, the loan couldnâ€™t have been modified in the first place, and if the homeowner didnâ€™t then it would just be throwing good money after bad.
Iâ€™m not sureâ€¦ I care.
All I know is that this is what happens when a reporter has no idea what he writing about and is taking his cues from government agencies that have lied and cried WOLFE so many times that all they can hope for is that no one is paying close attention.
Sorry about that.