Freddie Mac Forcing Foreclosures, Do Not Be Fooled

Here’s a recent article, Why Freddie Mac Has Misled Others About Short Sale Payoff Fraud,  on Freddie Mac [thanks Jessica!] and its draconian policies regarding short sales, and other loss mitigation, as well as its discouragement of private investing in real property.

The recent revelation that Freddie Mac’s business unit has bet billions that home loan modifications would fail is shocking even to the most devout critics of the failed, taxpayer-funded entity. The transactions, known as “inverse floaters,” are not illegal. But rigging the housing market to ensure the investments deliver a profit might be.

In addition to being a bet against homeowners and the Obama administration’s litany of struggling programs designed to save homeowners and Freddie, the inverse floaters are a bet against the private housing market. The bets fail not only if loan modifications work, but also if private buyers purchase Freddie’s inventory of distressed property. And here’s where Freddie has a problem.

For more than a year, Freddie Mac has adopted numerous policies designed to prevent the private purchase of toxic assets and forced servicers to enforce these policies. Demands for unreasonable offers on short sales, delays in processing short sales, affidavits preventing resale of their properties after being rehabbed and deed restrictions on real-estate-owned properties restricting resale price are among the myriad obstacles private buyers face in trying to buy Freddie’s inventory.

Besides delaying the unwinding of the troubled entity, several of these policies may in fact be illegal. Restricting the ability of private buyers to resell their properties and attempting to dictate resale value constitute unreasonable restraint on alienation. In plain English, once Freddie sells one of its toxic assets, it has no standing in future transactions related to the property.

Freddie has attempted to justify these policies through a taxpayer-funded media campaign arguing that the act of buying, rehabbing and reselling a property constitutes a crime and is inherently an act of fraud. Both Freddie and Fannie Mae have worked with enforcement officials to convince them of this lie. To the embarrassment of these enforcement officials, Freddie left out one important detail: Every time it stopped a short sale, Freddie made money.

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