Wells Fargo & Co. shareholders protest the bank's foreclosure… (Paul Morris / Bloomberg )
Should federal officials lecture state lawmakers on policy? The general counsel for the Federal Housing Finance Agency, the regulator overseeing Fannie Mae and Freddie Mac, certainly seems to think so.
At issue are two bills backed by California Atty. Gen. Kamala Harris to set new rules for the foreclosure process. The bills ran into stiff opposition from lenders, so the top Democrats in the Assembly and state Senate moved them to a conference committee in the hope of working out a compromise that could keep them on track.
Alfred Pollard, who was a longtime banking industry executive and lobbyist before joining the FHFA, blasted the bills in a letter to five members of the conference committee. In addition to offering some specific technical objections to the bills, Pollard went on at length about the drawbacks of slowing the foreclosure process.
"State laws that stretch out the period for legitimate foreclosures -- after every effort is made to avoid foreclosure and to keep homeowners in their homes -- result in no added benefit for the homeowner and produce harm to the housing finance system and to neighborhoods," Pollard wrote. "Adding impediments to actions undertaken after default and layering restrictions on legitimate foreclosures, thereby permitting homeowners to stay in their homes for hundreds of days while not paying their mortgages, property taxes or homeowners' association dues, costs neighborhoods, costs lenders and, ultimately, costs local taxpayers and future borrowers."
Pollard conceded that even lenders must obey the law. "However," he warned, "adding new laws, procedures and requirements where sanctions have been applied and remedial steps taken, may only add to delays and produce no different outcome for homeowners who have received appropriate efforts at loan modifications or foreclosure avoidance approaches."
He went on to argue that the state didn't need to address problems in the foreclosure process because federal regulators and law enforcement officials are addressing the issue. In fact, he contended, "should a borrower be treated improperly, laws in all states have always provided protection for them from fraud or deceptive practices."
To which one can only say: Really?
Pollard must have been so busy trying to regulate Fannie and Freddie -- admittedly, a full-time job -- that he had no time to speak to any of the people across the country who've worked with defaulting borrowers. Or to the state prosecutors who've investigated lenders' practices.
Or maybe he thinks it's just peachy to have one set of bank employees foreclose on and repossess a home while another set is working with the homeowners on a loan modification.
That's not to say Harris' bills should pass as-is. Pollard offered some valid criticisms about the way the measures were drafted; for example, lawmakers should ensure that they don't provide new avenues for fraud, and the definition of "robo-signing" is too broad.
The FHFA also has a legitimate interest in the legislation. Its mandate is to protect taxpayers from excessive losses at Fannie and Freddie, which are under federal conservatorship. If California passes laws that deter lenders from cutting their losses on loans backed by Fannie or Freddie, the FHFA's job would be that much harder.
But it strains credulity to argue that the current system is working or that lenders are making "every effort" to avoid needless foreclosures. Lenders and loan-servicing companies have been timid, in part because they failed to scale up to meet the volume of defaults, in part because of the restrictions imposed on them by investors, and in part because they feared that more borrowers would default just to take advantage of the situation.
There's no question that foreclosure was the right result for millions of borrowers who took on foolish risks or who lost so much income in the recession that they could no longer afford to be homeowners. But the collapse of the housing bubble exposed a system so flawed, it led banks to foreclose on an untold number of homeowners who could have been rescued by the right kind of modification, one that saved the lender money in the long run.
State officials are right to try to fix that system, given that the foreclosure process is governed by state law. And Pollard's critiques about bill drafting can help that process. But he should save his foreclosure advocacy for when he returns to his former employ.