Warren Blasts FHFA for Blocking Short Sales

WASHINGTON — Sen. Elizabeth Warren is taking the Federal Housing Finance Agency to task, criticizing the conservator of Fannie Mae and Freddie Mac for opposing short sale deals designed to keep original borrowers in their homes.

In an op-ed published this week in the Dorchester Reporter, a community newspaper based in the Dorchester section of Boston, the Massachusetts Democrat said the FHFA "has blocked the way" to such deals through what is known as an "arm's-length" policy.

Warren highlighted certain short sales where a borrower's family or friends, or local nonprofit organizations, seek to buy an underwater home at fair market value and then arrange for the original homeowner to keep the property either by repurchasing it or paying rent.

"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," she wrote. "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 agency's reasoning, Warren said, is to prevent "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," she said. "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."

She described the plight of a specific Dorchester resident, Ramon Suero, and his family who hit hard times and fell behind on payments.

"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," Warren wrote. "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."

But in an emailed statement, an FHFA spokesperson said short sale deals can be exposed to elevated risks of fraud.

"Short sales are, by their nature, vulnerable to manipulation and FHFA's policy requiring that they be conducted at 'arm's-length' is in keeping with industry standard and is intended to avoid conflicts of interest and fraud," the spokesperson said. "FHFA has worked very hard to keep families in their homes, as evidenced by the more than 2.3 million loan modifications that have been completed since FHFA took over as conservator of Fannie Mae and Freddie Mac."