Fannie and Freddie’s Excuse for Abusive Foreclosures on Homeowners: “It’s Not Us! It’s the People We Hire!” (Part 1)

Fannie Mae and Freddie Mac, government-backed businesses who together own or guarantee about half of the outstanding mortgages in the country, were in Washington, DC last week defending themselves before a Senate committee looking into abusive – and in some cases illegal – foreclosure practices that have come to light in recent months.

The excuses voiced by the company’s top officials would be out-and-out laughable, if the consequences of the attitudes they demonstrate weren’t so tragic. The arguments Fannie and Freddie made indicate just how clueless they are to what is actually going on but is well-known by homeowners with mortgage problems and the advocates who defend them. Here’s an excerpt from a Washington Post article which drew from testimony prepared for the Wednesday, December 1, 2010, hearing :

Speaking to the Senate Banking Committee at a hearing on the national foreclosure debacle, Fannie and Freddie executives emphasized that they are not responsible for managing payments by borrowers on home loans or foreclosing on homeowners when they default.

These tasks, executives say, are the responsibility of mortgage servicers and law firms with which the companies contract.

“I want to underscore that Fannie Mae does not service loans. We rely on the loan servicing divisions of major banks and other financial institutions as the primary front-line operators and points of contact with the borrowers,” said Terence Edwards, executive vice president for credit portfolio management at Fannie Mae. “We pay servicers significant fees during the life of a loan to work with borrowers. Servicers are required under our servicing contracts to help borrowers in trouble, not just collect payments.”

Donald Bisenius, executive vice president of the single family credit guarantee business at Freddie Mac, made the same point. “Freddie Mac provides guidelines for the origination and servicing of our loans, and contracts with sellers and servicers to carry out these operations.”

Reading this, I almost fell out of my chair. I was dumbstruck. As an attorney at a law firm devoted to helping Maryland, Virginia, and DC homeowners with mortgage troubles, I could not believe they would proffer this defense, and certainly not with a straight face.

In my own law practice, if I make an error of law, I cannot blame my paralegals – the employees and contractors I hired personally, whom I control, and for whom I am absolutely responsible. (A friend of mine at the Office of US Trustee and I joke about this as the “respondeat inferior” defense – a play upon the legal doctrine of “respondeat superior” where an employer is liable for the actions of his employees.)

If I tried this argument in court, I would not be surprised to see a judge to roll his eyes.

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