Addressing the “Gordian Knot” of the Mortgage Foreclosure Crisis

Posted by NCBRC - October 11, 2012

In an ongoing struggle to untie what she deemed the “Gordian Knot” of the mortgage foreclosure crisis, a Special Master in Rhode Island expressed frustration at the stubborn refusal of Freddie Mac and Fannie Mae to consider good business solutions to this serious national economic problem. The Special Master, a former local banker, was appointed to oversee mediation and possible settlement in a case consolidating approximately 600 foreclosure actions in a federal District Court action. In re Mortgage Foreclosure Master Docket, No. 11-88 (D. R.I. Oct. 4, 2012). At a status hearing the Special Master issued two reports, which include these scathing remarks about FannieMae and FreddieMac and their unwillingness to consider principal forgiveness:

“An exception in scheduling was made for FNMA / FHLMC cases. They are involved in a significant number of cases, but were not scheduled because I did not believe the result would be productive. I have made no secret of how troubled I am by these agencies and, to a lesser extent, their respective counsel. Most of the defendant servicers, off the record, describe how bureaucratic and difficult to deal with FNMA and FHLMC are. They already have cost our taxpayers billions. And lawyers who have clients like FNMA / FHLMC have the capacity to litigate indefinitely because their clients are unresponsive to good business solutions. So our taxpayer dollars are being utilized to fund a significant amount of lawyering that may not be productive from a business standpoint. Privately, counsel to other defendants also will say as much.”

“The reason the settlement process – nationally and in the Special Master process – has not been as productive as we want, is that the decision making corporate players – FNMA, FHLMC and the servicers – generally start from a premise that is largely uneconomic for an individual borrower. They do not forgive principal. Rather, they try to figure out what a defaulting borrower can “afford” to pay monthly, and by reducing the interest rate, stretching the amortization out to 40 years and putting a balloon on the back end, leave the principal balance of the mortgage intact.

“May I say it directly: This is WRONG!

“For the many borrowers who want to stay in their homes, they accept this solution, if offered. But just as these borrowers were probably not astute financially, overleveraged themselves and made imprudent or unrealistic economic decisions earlier, they remain naïve consumers. A defaulting borrower staying in a house which is significantly underwater is economic folly and can have serious adverse, longer-term personal consequences. And, unfortunately, just as the system before encouraged inappropriate overleveraging, the system now, for a variety of reasons, continues to promote poor economic decisions on the part of average borrowers.”

Special Master Overview

Special Master Second Report


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