Freddie Mac failed to refer nearly 58,000 foreclosed mortgages with about $4.6 billion in shortfalls to vendors who assess borrowers' ability to repay and are responsible to collect mortgage payments, thus foregoing a chance to recover dues from homeowners who had the ability to repay, according to an audit report from the Federal Housing Finance Agency’s Office of Inspector General, or OIG, in Washington.
“Because the deficiencies were not referred for consideration of recovery, the portion of the $4.6 billion that may have been collectible is unknown Freddie Mac eliminated any possibility of recovery when it did not refer foreclosed mortgages for evaluation of collectibility," the report said.
The defaults were made by home owners on government-guaranteed loans in states that had provisions for making post-foreclosure collections, and this included strategic investors who stopped repaying their loans because the value of the mortgaged property dived more than what they owed to the company, the audit showed. A strategic investor stops repaying the loan, if either a property’s foreclosure sale’s proceeds or the value at which Freddie Mac records a property in its real estate portfolio is less than the borrower’s mortgage loan balance, causing a loss to Freddie Mac.
The report recommended that these defaulters should be pursued and the loss should be recovered from those defaulters as a deterrent to other defaulters.
“Such losses can be reduced if the enterprise recovers deficiencies from borrowers who possess the ability to repay. Enhanced deficiency management practices can also serve as a deterrent to those who would choose to strategically default on their mortgage obligations,” the audit report said.
The report also pointed out that Freddie Mac, unlike Fannie Mae, did not chase deficiencies arising from third-party sales causing further losses to the company. The company suffered losses as delays in the venders’ evaluation process resulted in Freddie Mac losing the opportunity to pursue shortfalls related to more than 6,000 foreclosed mortgages for which the state statutes of limitations had expired, the report said.
“These are pennies on the dollar, but it sets an example,” Frank Pallotta, managing partner at Loan Value Group, a mortgage consulting firm, told Bloomberg News. “There’s a contagion effect that kicks in when people who are underwater see their neighbors walk away without having to give up cars or boats or vacation homes,” he added.
Freddie along with Fannie, was taken over by the U.S. government during the 2008 financial crisis, as they moved closer to bankruptcy. The Federal Housing Finance Agency took over the companies and infused billions of dollars to keep the companies afloat, and to prop up the housing and mortgage sectors.