A ban on foreclosure sales and evictions from houses owned by mortgage giants Fannie Mae and Freddie Mac, which began as a high-profile effort just before the holidays to keep people in their homes as the government tried to come up with homeowner rescue plans, is over.
Spokesmen for Fannie Mae and Freddie Mac confirmed the ban ended March 31, in a response to an inquiry from our sister site, The Washington Independent. But its expiration didn’t seem to merit the same level of fanfare, with some housing advocates caught by surprise, scrambling for information today and Wednesday on listservs and in phone calls.
The agencies made a major announcement in November to roll out the ban, garnering headlines and extensive news coverage. Freddie Mac CEO David Moffett issued a statement at the time, saying the ban “provides a new measure of certainty” to families facing foreclosures during the holidays.
Danilo Pelletiere, research director for the National Low Income Housing Coalition, said the ban’s eventual expiration wasn’t unexpected – but it also wasn’t clear specifically when it was supposed to end. Some housing attorneys and advocates were confused because they were in the middle of cases that would be affected by the expiration. Fannie and Freddie have repeatedly extended the ban, which was originally expected to expire on Jan. 9.
Fannie Mae said in a brief statement from spokesman Brian Faith that “Fannie Mae’s suspension of foreclosure-related evictions concludes as of March 31, 2009. The company has in place special foreclosure sale requirements that take into account the Making Home Affordable program. A foreclosure sale may not occur on any Fannie Mae loan until the loan servicer verifies that the borrower is ineligible for a Home Affordable Modification and all other foreclosure prevention alternatives have been exhausted.”
Since the ban started, both Fannie and Freddie have developed rental programs to keep tenants from being evicted from foreclosed properties owned by the two agencies.
In addition, the Obama administration in March unveiled its plan to help troubled borrowers either refinance their homes or modify their mortgages.
Housing advocates aren’t exactly cheering about the ban being lifted. But they are hoping the new programs succeed, and plan to keep a close eye on their progress, Pelletiere said.
The lifting of the ban will be a testing ground for the administration’s approach to foreclosures. A bill to allow bankruptcy judges to modify mortgages has stalled in Congress. Money from the Troubled Assets Relief Program has gone to banks and bailout efforts. The ban, enacted as foreclosures soared and the holidays approached, was the government’s first dramatic step to help homeowners. The housing rescue plan was developed and announced only after the Treasury Department first unveiled its plan to buy toxic assets from banks.
“A perpetual moratorium is not a solution to how we do foreclosures in the future,” Pelletiere said. “It’s a holding pattern. We need to break that holding pattern to allow for something else positive to happen.”
Brad German, a spokesman for Freddie Mac, said he was “mystified” as to how anyone could be surprised by the ban’s expiration. The idea behind it was to give the government time to create homeowner rescue plans, and that’s been done, he said. Neither agency also expects a flood of homeowners out on the street because the ban is being lifted, he added.
“For all practical purposes, people will be in their homes for a while,” despite the ban’s expiration, German said. Fannie and Freddie will need time to approach tenants and homeowners and figure out whether they are qualified for help, he said.
Separate programs launched recently by Fannie and Freddie to allow tenants to stay in Real Estate Owned (REO) foreclosed properties owned by the agencies and lease them on a month by month basis at market rents, until they can be sold again, are not affected by the ban’s expiration, German said. Those programs will continue, with no expiration date scheduled. Fannie’s program covers renters of foreclosed properties, while both former owners and renters can qualify for Freddie’s program.
The REO rental programs aim to reach out to those no longer covered by the foreclosure ban and see if they can qualify, German said – which mitigates the effect of the ban being lifted. For example, under Freddie Mac’s program, a homeowner currently facing eviction could stay in his house as a renter until it is sold, if he meets the program’s guidelines.
But with little information to go on today, housing advocates found themselves in confusion and concern over whether the REO program was ending, and whether all renters would be subject to evictions again.
Even when the Fannie and Freddie ban was active, however, it sometimes failed to reach people before they got evicted, said Judith Liben, a senior housing attorney with the Massachusetts Law Reform Institute, a nonprofit legal services advocacy group. Only the District of Columbia and a few states have no-fault eviction laws requiring that a lease survives foreclosure, and that tenants can’t be automatically evicted. And the new REO policy by Fannie and Freddie, while laudable, takes time to reach the neighborhood level, Liben said.
Expanding no-fault eviction laws could be one answer to the problem of renters facing evictions, Liben said. Other states are moving to require more foreclosure notice for tenants.
The vulnerability of tenants to foreclosure evictions, along with falling property values of vacant and foreclosed homes, are prompting Liben and others to question the banking industry’s reluctance so far to move toward allowing people to stay in foreclosed houses and pay rent. Many are hoping the rest of the mortgage industry will follow Fannie and Freddie’s lead in establishing REO rental programs.
“Very few people have reached the stage where they are looking at renters as part of the solution,” Pelletiere said. “There’s almost a resistance to it. Bankers in particular still have this mindset that ‘I need to get those people out and sell the house right away.’ But rental housing really is part of the solution to this crisis.”
An oversupply of housing, combined with a weak economy that often requires people to move to find new jobs – and not tied down to a house they can’t sell – makes renting an especially worthwhile option, Pelletiere added. “Until the economy finds its footing, we don’t want to put pressure on people to settle down,” he said. “In the past we’ve had a very significant bias toward homeownership that has been to the detriment of rental housing. And that has to stop. Housing policy going forward really has to balance out a little more. In the long term, rental housing can be good for communities.”
Problems with bank-owned foreclosed properties that sell for way below market value, for example, could be addressed by keeping renters in the houses.
Community groups last month urged Congress to crack down on the practice of Broker Price Opinions, which are cheaper substitutes for full appraisals and are used to determine a property’s value. BPOs often are performed by real estate agents with minimal training and cost as little as $50, compared to $300 and above for a traditional appraisal. They are increasingly employed by lenders for sales of bank-owned foreclosed properties, known as REOs, or Real Estate Owned properties, and for short sales, in which owners sell their homes for less than they are worth. The bank forgives the difference, and takes a loss.
Using a BPO is illegal in more than 20 states, but the practice has become widespread, said David Berenbaum, executive vice president of the National Community Reinvestment Coalition. The BPOs frequently result in lowball estimates of a property’s value, with lenders using them to unload REOs and short sale properties. Agents who perform BPOs have an inherent conflict of interest, because they are working for lenders who want to quickly dispose of properties. Speculators and other investors scoop them up at the fire sale prices, dragging down property values overall.
“Right now, it’s a race to the bottom,” Berenbaum said. “They’re having a terrible impact on property values.”
Whether or not they use BPOs, banks increasingly are selling off REOs at low prices, even in stronger housing markets. In Temecula, Calif., for example, Citigroup sold a foreclosed house for just $139,000, when comparable houses in the area were going for $240,000 to $260,000, the North County Times reported – meaning the bank left some $100,000 on the table.
In markets where the REOs don’t sell and lenders fail to maintain their properties, other problems persist, with neighborhoods facing a glut of abandoned homes and blight, as TWI has explained. RealtyTrac, an online foreclosure database, predicts a record 1.5 million REOs this year, meaning more trouble ahead.
Given all this, some housing advocates can’t understand why lenders aren’t allowing more former homeowners or current tenants to pay rent and live in foreclosed houses until they can be sold. The new REO rental programs of Fannie Mae and Freddie Mac marked a major step toward that goal. But there’s been no major private industry initiative to move beyond the model of getting owners and tenants out ASAP, Berenbaum noted, despite the obvious benefits of doing so.
“Frankly, if the mortgage industry would allow homeowners facing foreclosure to remain in the properties as tenants, it would stabilize their investments and stabilize the communities,” Berenbaum said.
But bloated REO inventories are proof of how overwhelmed servicers and lenders due to record numbers of foreclosures – and they’ve said repeatedly they don’t want to be in the property management business. They also contend they’re not always the ones responsible for the vacant homes problem. In a magazine published by the Housing Wire mortgage blog, Robert Klein, CEO of Safeguard Properties, a major servicer, put it this way:
“The fact is, as an industry, mortgage servicers spend in excess of $2 billion annually to take care of vacant properties so they don’t become nuisances to neighbors and communities. Unfortunately, servicers who are the ‘good guys’ get lumped in with property flippers and Internet investors whose irresponsible practices have been major contributors to urban blight.”
Despite that blight, lenders and servicers seem to be closing their eyes to the possibility of economic benefits from filling empty houses with renters, said Liben said.
“I think that the mortgage industry and the banking industry are very slow to catch on to why things are different in this particular crisis,” Liben said. “They aren’t even trying to be creative. It’s like “This is the way we’ve always done it. Get people out and sell the house and get new people in and that’s that.’” Or, “We don’t want to be landlords.’” That’s all they ever say. ”
Foreclosed and vacant houses often lose 50 percent of their market value by the time they are sold out of bank REO inventories, Liben said. Those kind of losses should be spurring the industry to at least undertake a cost benefit analysis to figure out whether it might be more financially advantageous to rent out the properties, she said.
“Maybe those properties wouldn’t have declined by 50 percent if they had people in them,” Liben said.
Creating policies to encourage lenders to rent their foreclosed properties remains an uphill battle, said Dean Baker, co-director of the Center for Economic and Policy Research. The mortgage industry just isn’t interested in getting involved in the rental market. And some of the nonprofit development groups that overreached in promoting homeownership during the boom, putting people in houses they couldn’t afford, aren’t taking the lead on initiating rental options, he said.
“They don’t want to own up to what they did,” Baker said. “They’ve pretty much put their heads in the sand.”
Pelletiere, of the National Low Income Housing Coalition, said the rental issue remains a “tense” one for some nonprofits, because of the bitter controversy over whether the Community Reinvestment Act, an anti-redlining law, played a role in the housing crisis. Conservatives have blamed the CRA and poor and minority borrowers for the foreclosure crisis, saying the government forced lenders to make risky mortgages to them to meet CRA requirements.
Nonprofits fought that campaign by pointing out that most subprime loans were made by independent mortgage brokers and firms not covered by the CRA. Nonetheless, the belief persists, and nonprofits are wary of ceding any ground on the issue by changing their focus to promoting renting, Pelletiere said.
For the lending industry, the issue is far less complicated, Liben charged. The savings and loan crisis should have prepared them to better manage their REOs, she said. “They have no excuses,” she said. “They should have seen this coming.”
In the absence of industry initiatives, economists and housing experts have been floating various rental ideas, including allowing a delinquent homeowner to give the property back to the bank, in return for having his credit wiped clean. Rent-to-own programs, in which a portion of rent goes toward a downpayment, also are being revived in some communities with too many foreclosed homes.
But none of those efforts will gain a foothold until the mindset that renters are a detriment to a neighborhood begins to change, Pelletiere said. Or until renting is seen as one of the answers to the problem of foreclosures and vacant homes. For those reasons, he and others will watch closely as Fannie and Freddie run their REO rental programs, and try to keep people in their homes as a ban on foreclosure sales and evictions finally ends.