In an article from last week about Fannie Mae pursuing deficiency judgments in Florida, Gretchen Morgenson essentially defends Fannie Mae, saying this (“Borrowers, Beware: The Robo-Signers Aren’t Finished Yet,” New York Times, Nov. 15 2014):
“Fannie Mae is certainly justified in going after deficiencies from former borrowers, especially those who can pay. And given that the company is taxpayer-owned, its attempts to recover this money are to the greater good.”
WTF? I mean, WTF?
Overall, the gist of Morgenson’s article is correct—that deficiency judgments shouldn’t be allowed when the foreclosure that created the deficiency was performed using robo-signed, i. e., fraudulent, documents. However, in the sentence above, she seems to make two common yet incorrect assumptions about Fannie Mae.
The first incorrect assumption
The first erroneous assumption is that Fannie Mae is “justified” in pursuing deficiencies from “former borrowers.” To be fair, Morgenson seems to be using some shorthand here, but it should be noted that Fannie Mae does not loan money to borrowers, so there is no justification for Fannie Mae to pursue anyone in that regard. Here is confirmation of this fact from Fannie Mae’s conservator, the FHFA:
Do Fannie Mae and Freddie Mac make loans directly to home buyers?
No. Fannie Mae Freddie Mac support the nation’s housing finance system though the secondary mortgage market and do not make loans directly to borrowers; rather, banks, credit unions, and other retail financial institutions originate home loans to borrowers. Generally, lenders do not retain the mortgages they originate as assets on their own books. Instead, they often sell conventional conforming mortgage loans soon after origination to Fannie Mae or Freddie Mac. The Enterprises thus provide liquidity for mortgage lenders, which receive cash that can be used for additional mortgages.
Note the last bit of tripe in the quote above stating that lenders “sell conventional conforming loans soon after origination to Fannie Mae or Freddie Mac.” This is the prettified version of the ugly truth, which is that such sales of mortgages on the secondary market are mere chicanery and accounting tricks at best, and outright fraud at worst.
This alleged securitization has been covered extensively here at LRM in a number of articles, including but not limited to the following:
So the other part of the assumption Morgenson (as well as the FHFA FAQ above) is making is that, while Fannie Mae may not have actually loaned money to the borrowers, Fannie owns the notes and is therefore entitled to foreclose—supposedly Fannie Mae “securitized” these notes. This is Morgenson’s “justification” for foreclosure and deficiency judgments accruing to Fannie Mae. This is the conventional wisdom, but as usual, it’s completely wrong, because to add to the litany of securitization fail articles above, we must point out again that Fannie Mae itself admits that none of the notes it supposedly has are Fannie Mae assets.
Here is the relevant quote from the LRM story “Fannie Mae, By Its Own Admission, Owns Nothing”:
“The mortgages that back a Fannie Mae MBS are held in a trust on behalf of Fannie Mae MBS investors and are not Fannie Mae assets.”
The logical question then is, how can a foreclosure or deficiency judgment on behalf of Fannie Mae possibly be “justified” if the notes are not Fannie Mae assets? And again, Fannie Mae says this about itself—this is not my opinion or some expert’s opinion. This is Fannie Mae’s own incredible admission.
The second incorrect assumption
Morgenson then states that Fannie Mae is “taxpayer-owned,” which means that ruling in favor of Fannie Mae in deficiency suits is a good thing, because that essentially pays back the taxpayer. Indeed, there is a common misconception—whether out of ignorance or out of complicity, I’m not quite sure—made by the media that Fannie Mae and Freddie Mac are now owned by the government—i.e. the taxpayer—because of the conservatorship of those two institutions that began in September 2008.
The FHFA FAQ certainly appears to be fostering misinformation about the ownership status of Fannie and Freddie vis-à-vis the conservatorship:
When did the Federal Housing Finance Agency become conservator of Fannie Mae and Freddie Mac, and what does it mean to be conservator?
On September 6, 2008, weeks after enactment of the Housing and Economic Recovery Act, Fannie Mae and Freddie Mac were placed into conservatorships overseen by the Federal Housing Finance Agency. As conservator, the Federal Housing Finance Agency assumed all the powers of the shareholders, directors, and officers, with the goal of preserving and conserving the assets and property of Fannie Mae and Freddie Mac.
Certainly sounds like Fannie and Freddie are “taxpayer-owned,” doesn’t it? If the FHFA has taken over “all the powers of the shareholders, directors, and officers,” isn’t that effectively the same as being “taxpayer-owned?” If you were a shareholder or director or officer of a company and then a federal government agency came in and “assumed” all of those powers, wouldn’t you say that the government owned that company, for all intents and purposes? Of course you would.
However, the FHFA likes to talk out of both side of its mouth. That is, we see that on the one hand—for public and media consumption—we are told that FHFA has all the powers of Fannie Mae, i.e., runs and essentially now owns Fannie Mae (throw in the unlimited bailout of Fannie Mae as a consideration in this ownership, also—we paid them to run their business). A lot of people, myself included, took the government at face value when it said of Fannie Mae that:
The Conservator [i.e., FHFA] directs and controls the operations of the Company [i.e., Fannie Mae].
We figured, “This is great—now we can get at Fannie’s records through FOIA requests because a government agency ‘directs and controls’ Fannie Mae.” So, I sent them a FOIA request asking for specific information about my note and Fannie’s role in supposedly buying it from Countrywide, owning it, putting it into a pool, etc. As you would expect, my initial request was denied, saying this:
“We understand why you might assume that FHFA, as Fannie Mae’s regulator, would have records responsive to your request. However, under FOIA, only FHFA records are subject to disclosure. FHFA does not maintain among its records the type of individual loan information from Fannie Mae that you request, and therefore does not have records responsive to your request.”
However, James Lockhart, the head of FHFA at the beginning of the conservatorship, testified that:
“Since the Enterprises opened for business on September 8, FHFA personnel have been continuously on site, both at the Enterprises’ headquarters and locations of other key operations to ensure a smooth transition and continued business operations. FHFA personnel include examiners, attorneys and other experts to provide for timely communications between the GSE, the conservator, and the examination team.”
So FHFA “directs and controls” Fannie Mae and has examiners, attorneys, and other experts “continuously on site” at Fannie headquarters and other Fannie locations, but FHFA doesn’t have records responsive to my request. I called bullshit and appealed.
Their response to my appeal is below, but here is the insulting, speaking-out-of-both-sides-of-their-mouth part:
“Fannie Mae is a private company whose documents are not subject to the FOIA…The purpose of the FOIA is to open the actions of government agencies to public scrutiny, not to reveal the inner workings of private entities. The FHFA’s temporary role as conservator of Fannie Mae does not transform the business records of this private company into ‘agency records’ subject to the FOIA.”
In other words: screw you Mac—we ain’t talkin’ and you can’t make us, so there.
This letter is signed by a Stephen E. Hart, as “Associate General Counsel and FOIA Appeals Officer.” So the opinion of at least one FHFA attorney is that Fannie is not “taxpayer-owned” as Morgenson suggested—it is a private company not subject to public scrutiny.
It just wants to subject everyone else to “screw-tiny.”
So keep these two things in mind when you read about whether or not Fannie Mae is “justified” in foreclosing or pursuing a “deficiency”: 1) Fannie Mae itself admits it neither lends money nor considers your note an asset, and 2) Fannie Mae’s conservator says it’s a private company and nanny nanny boo boo.