California Launches Investigation Into Fannie and Freddie

Investigators with the California attorney general’s office have subpoenaed Fannie Mae and Freddie Mac as part of an inquiry into lending and foreclosure practices in the state.

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Investigators are seeking information specifically about the government-controlled finance companies’ activities in California, including their roles as landlords who own thousands of foreclosed properties in the state.

The attorney general’s office is also seeking information on Fannie and Freddie’s mortgage-servicing and home-repossession practices, and hope to learn more about the companies’ purchases and sponsorships of securities holding “toxic mortgages” in the state, according to sources who spoke on condition of anonymity.

California’s Kamala D. Harris has been the most aggressive state attorney general in trying to assist “underwater” borrowers — those who owe more than their homes are worth — on their mortgages, according to Edward Mills, a financial policy analyst at FBR Capital Markets & Co.

Harris feels that Ed DeMarco — head of the Federal Housing Finance Agency in Washington, which regulates Fannie and Freddie — “has not done enough to help homeowners and has undue influence over what changes are put in place” at the two companies, said Mills. Harris’ investigation is a creative way to potentially fore policy changes from the mortgage giants over DeMarco’s objections, added Mills.

DeMarco has been unwilling to support principal reduction — writing down the loan balances of troubled borrowers — saying in congressional testimony on Wednesday that doing so is not “the least-cost approach for the taxpayer” to keep homeowners from foreclosure. Additionally, those reductions are not authorized under the law that allowed the firms to be seized, said DeMarco.

“I do believe we are taking all due effort to provide assistance to homeowners, and I do not believe I’ve been authorized to use taxpayer money for a general program of principal forgiveness,” DeMarco told lawmakers.

“If Mr. DeMarco is unwilling to support principal reduction for these home loans in crisis, he should step aside for someone who will,” said Harris in response.

Harris’ investigation seeks to determine to what extent the two mortgage giants contributed to the foreclosure crisis in California. Though the investigation will deal only with Fannie’s and Freddie’s activities in California, it could lead to other investigations in other states. Fannie and Freddie are responsible for about 40% of all home loans in the U.S.

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