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The Failures of Fannie: Responsibility for the Mortgage Servicing Mess

By Katie Porter

The news that an Illinois court is halting foreclosures by law firm Fisher and Shapiro LLC will spark another round of frustration about who is responsible for the mess that is the mortgage servicing industry. There is plenty of blame to go around, but I rarely hear mention of the contributions of Fannie Mae and Freddie Mac  to the mortgage servicing industry. 

Fannie and Freddie, whatever one thinks of them in their role as guarantors, are a serious part of the problem in the mortgage servicing world--and they long have been. As an initial matter, consider that Fisher and Shapiro, the Illinois firm that admitted to altering affidavits to add fees, is an approved Fannie Mae firm to foreclose on homeowners in Illinois. You can verify this for yourself on Fannie's publicly available "retained attorney list." Fannie pulled a couple of Florida firms off its list following allegations of misbehavior according to Housing Wire, but this type of "oops, a bad one slid by" reaction from Fannie is exactly part of the problem. It is still treating mortgage servicing as a "bad apple" problem and not a "rotten barrel" problem. Of course, Fannie built the barrel to a large extent through its servicing guidelines, so perhaps Fannie is incapable of rethinking mortgage servicing. 

To my mind, the Fannie and Freddie guidelines are a big part of the fast-at-all-costs attitude of the mortgage servicing world and for the incredible concentration of foreclosure work in a few law firms. These firms were rewarded by Fannie with all or most of the work for a given state because they could meet  Fannie's time and cost guidelines for "appropriate" servicing. But those guidelines themselves are/were often the problem. 

To take a specific example, consider bankruptcy proofs of claim. Years ago, I wrote about the lack of compliance with the bankruptcy rules of procedure in the preparation of claims. I heard from a lot of people concerned about the problem, including some in the industry who wanted to help me understand their challenges or who frankly shared my concerns. Not a peep from Fannie-- ever.  Yet, Fannie's servicing guidelines are a big part of why shoddy practices exist in the bankruptcy world. Fannie will only reimburse $150 for the preparation of a bankruptcy proof of a claim, hardly enough in today's climate for a firm to comply with the legal rules, such as verifying that fees and cost really are pre-petition, calculating the escrow to guard against bankruptcy "double-dipping," and locating the copies of the note and mortgage required by the rule. The result is claims that often skirt the law, or even violate it. There are similar problems with state foreclosure laws and how they interact with the guidelines. 

Fannie announced on February 23, 2011, years after complaints about mortgage servicing became literally front-page NYTimes headlines, that it is launching a servicer accountability program, I do not think we can afford to leave Fannie and Freddie to clean up the servicing mess that they helped spawn. Fannie and Freddie are in control of the government. I hope that a big part of any settlement by the Attorneys General and the federal regulators will be to rework the servicing guidelines, including Fannie and Freddie's "dual-track" guideline that requires mortgage servicers to move ahead with foreclosures even as homeowners are being considered for modifications. 

As I said at the beginning, there is ample blame to go around for the mortgage servicing mess. Lawyers have professional responsibilities to courts, to the profession, and to the public. Fisher and Shapiro, like several other firms, breached those duties. But Fannie hired them, supervised them, and paid them millions of dollars, and the buck should stop at Fannie--our own taxpayer-supported entity--to become part of the solution and stop being part of the problem. 

Full post as published by Credit Slips on March 31, 2011 (boomark / email).