Commentary: FHFA’s Senseless Arm’s-Length Policy on Short Sales

By Senator Elizabeth Warren

Senator Elizabeth WarrenSenator Elizabeth WarrenAs our nation struggles to emerge from the worst recession in decades, the last thing a government agency should do is make it more difficult for Americans to stay in their homes. Unfortunately, that is exactly what the Federal Housing Finance Authority (FHFA) has been doing.

Since the 2008 financial crisis, millions of homeowners have fallen behind on their mortgages. Many lost their jobs in the crash, while others lived through medical problems and family break ups. Many others had complicated mortgages they didn’t understand, and when monthly payments shot up by hundreds of dollars, they ended up in foreclosure.

While the housing market has generally recovered in many parts of the country, there remain large pockets of people caught with homes that were purchased or refinanced during a bubble that are now deeply underwater. Millions of homeowners have tried to sell their homes, but with big mortgages on the property, they need approval from their lender to engage in a short-sale—selling for less than the outstanding mortgage.

Short sales can make good sense, and private lenders have gone along with them in many cases. But the FHFA – the regulator overseeing the bailed-out housing giants Fannie Mae and Freddie Mac and the financing of about half the country’s outstanding mortgages – has blocked the way.

In some of those short sales, friends, families, or nonprofit organizations are willing to buy the home at fair market value, then work out a rental or re-sale to the family living in it. The mortgage company gets the same amount as in a sale to strangers, but the homeowner has a last-chance to save the family home. This is a win-win for both sides—more money for the mortgage lender and a family that saves their home. But the FHFA flatly refuses these deals. The agency’s so-called “arm’s-length” policy means that it will instead demand that the family be moved out and the home be sold at a lower-priced foreclosure sale.

The FHFA claims that its policy prevents sweetheart insider deals that benefit the homeowners at the expense of Fannie and Freddie. But that makes no sense when the house is sold at market value or when people affiliated with the homeowner put in the highest bid to save the home. In those cases, the identity of the bidder makes no meaningful difference because Fannie and Freddie’s bottom line stays the same. And every time a family stays in a home—rather than being pushed into foreclosure—the neighborhood does better and the overall housing market does better—both of which help the value of all the other mortgages that FHFA holds.

I recently met with Ramon Suero from Dorchester. In 2005, Ramon bought the top unit in a triple-decker—right when the real estate bubble was most inflated. He managed all his payments on time until he lost his job and his wife took off time to care for her sick mother. When he fell behind on the mortgage, Freddie Mac started to foreclose on Ramon and his family, and it refused to work out a modification even after they were both back at work.

The situation was grim, but a non-profit called Boston Community Capital thought the Suero family was a good risk. The group made a cash offer to buy the property at more than its market value for the purpose of selling it back to the family. The non-profit recognized that Ramon and Rosanna could eventually make the payments and were hard-working people who simply caught a bad break.

Following the FHFA’s rigid rule, however, Freddie Mac refused the deal. Instead of doing everything it could to help keep residents in their homes, the FHFA bent over backwards to have the Sueros thrown out. This is exactly the opposite of what should be happening.

The FHFA should eliminate its senseless arm’s-length policy. Instead, it should encourage short sales, especially when doing so will keep responsible homeowners – people able to repay their monthly payments but who had just caught a bad break -- in their homes. As a matter of human decency, the Sueros should have the same chance as a stranger to live in the only home their children have ever known.

But if FHFA is unmoved by human decency, it might want to consider hard-headed economics. Each foreclosure increases the chances of a continuing string of more foreclosures in the same neighborhood. Every time the FHFA pushes another home into foreclosure, it drives down the values of nearby properties and further destabilizes the housing market. Those costs are imposed on every neighbor. Now that the US taxpayer is on the hook for guaranteeing most outstanding mortgages, every time FHFA pushes toward a foreclosure rather than a workout with a homeowner, taxpayers are the ultimate losers.

The arm’s-length policy is just one of many examples of how the FHFA has acted against homeowners’ interests and taxpayers’ interests during the time Acting Director Edward J. DeMarco has led the agency. President Obama nominated a permanent director to replace DeMarco back in 2010, but Senate Republicans scuttled the nomination. Now, the Obama Administration is trying once again to replace DeMarco, this time nominating Rep. Mel Watt (D-N.C.) to head the agency.

I am hopeful that, under Congressman Watt’s leadership, the FHFA will become the agency it should have been all along: one that cares about keeping struggling families in their homes and one that will help strengthen America’s housing market.