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Fannie Mae to pay $53 million to settle fair housing violations
On February 7, the Fair Housing Advocates of Northern California, along with the National Fair Housing Alliance and 19 local fair housing organizations from across the country announced a $53 million settlement with Fannie Mae to resolve allegations that Fannie Mae allowed foreclosed homes in predominantly White neighborhoods to be better maintained and marketed than similar homes in communities of color, a claim corroborated by a four year-long investigation of over 2,300 Fannie Mae real estate owned (REO) properties in 39 metropolitan areas. The plaintiffs alleged that they attempted to get Fannie Mae to voluntarily comply with the Fair Housing Act and change its discriminatory policies and practices, but claimed that Fannie Mae “continued to maintain its REO properties differently based on the predominant race and national origin of neighborhoods” and caused “particularized and concrete injury to those homeowners and residents.”
Under the terms of the settlement, Fannie Mae is required to pay $53 million to cover claims for damages, attorneys’ fees, and cost. Nearly $35.4 million of the settlement amount will be used to address community needs, including “addressing home ownership, neighborhood and/or community stabilization, access to credit, property rehabilitation, residential development in African American and Latino communities, fair housing education and outreach, counseling, and other fair housing activities” in the allegedly harmed areas.
The announcement further noted that the plaintiffs—who will manage and disburse the settlement funds—intend to provide grants that will go towards down-payment assistance for first-generation homebuyers and renovations for homes that languished in foreclosure, as well as innovative programs and partnerships to promote fair housing. The announcement also noted that Fannie Mae has implemented several measures to avoid similar occurrences in the future, such as increasing its oversight of maintenance of its REO properties, prioritizing owner-occupants instead of investors as purchasers of REOs, ensuring compliance with fair housing laws, and providing fair housing training to its employees and vendors. According to the announcement, this case marks the first time a federal court confirmed that the Fair Housing Act has covered the maintenance and marketing of REO properties.
Following the announcement, HUD released a statement applauding the settlement. “It is our hope that settlement of these cases will bring about much needed positive outcomes for these undeserved communities,” Principal Deputy Assistant Secretary for HUD’s Office of Fair Housing and Equal Opportunity Demetria L. McCain said. “We also hope mortgage lenders across the country will take steps to avoid fair housing violations in their own REO portfolios.”
Congressional Leaders Urge FHFA To Investigate Fannie and Freddie Contractors
On December 11, Representatives Cummings (D-MD), Waters (D-CA), and Moore (D-WI) led the effort to submit a letter to FHFA’s IG requesting that the agency conduct a comprehensive audit to determine if Fannie and Freddie “are taking adequate steps to ensure that preservation companies maintain or service REO properties in compliance with the requirements of the Fair Housing Act.” The letter, which was signed by a total of 26 House Members, suggested that companies contracted by Fannie and Freddie to maintain their REOs provide inferior service within African-American, Latino, and other non-Caucasian communities. The Representatives’ allegations stem from National Fair Housing Alliance (NFHA) research, in addition to complaints filed with HUD and several U.S. banks. Moreover, the letter comes directly after the December 9 Senate Banking Committee hearing, “Inequality, Opportunity, and the Housing Market,” during which Deborah Goldberg, Special Project Director of NFHA, addressed that REOs are managed differently based on the community of the property.
Cleveland Federal Reserve Bank Examines Benefits of Fast-Track Foreclosure
On March 6, the Federal Reserve Bank of Cleveland published a staff commentary that examines how the implementation of a fast-track foreclosure process in Ohio and Pennsylvania would affect the housing markets in those states. The researchers explain that the current foreclosure laws in Ohio and Pennsylvania create “deadweight losses” for those state’s economies, i.e. costs without corresponding benefits, associated with vacant, foreclosed homes. Specifically, the researchers estimated for those two states: (i) the number of foreclosures that sit vacant; (ii) the amount of deadweight loss associated with vacant homes; and (iii) annual savings under a fast-tracking framework that eliminates deadweight losses. Their findings suggest that fast-tracking foreclosures would “shave between 8 and 43 days off the average duration” of vacant homes in Ohio, and between 9 and 20 days in Pennsylvania, eliminating an estimated $24 to $129 million of deadweight loss in Ohio, and $24 to $54 million in Pennsylvania.
HUD Updates REO Policies
On December 6, HUD issued Mortgagee Letter 2013-44, which updates HUD’s policies on (i) the use of an FHA-insured mortgage to purchase a HUD REO property; and (ii) the use of distressed properties in determining the market value of REO properties. With regard to the first, the letter provides a chart of conditions that trigger a requirement for the mortgagee to order a new appraisal. According to the letter, if a new appraisal is ordered, then (i) the original appraisal ordered by HUD may not be used to underwrite the loan; (ii) HUD will not reimburse the mortgagee for the cost of the new appraisal and the borrower/purchaser can be charged for the expense of the new appraisal as part of the borrower’s closing costs; (iii) the mortgagee must provide a written justification for ordering a new appraisal; and (iv) the mortgagee must retain copies of all appraisals available to the mortgagee in its loan file. With regard to establishing market value of REO properties, the letter details the conditions implicit in HUD’s characterization that a market value price should “reflect the price appropriate for properties sold in a competitive and open market, under all conditions requisite to a fair sale, with the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.” In addition, the letter states that, when considering sales to be used as comparables, the appraiser must note the conditions of sale and the motivations of the sellers and purchasers, and that in developing an opinion of market value, REO sales and pre-foreclosure sales transactions should only be chosen as comparables if there is compelling evidence in the market to warrant their use. Mortgagees are required to implement the policy changes in the letter by February 4, 2014.
HUD Announces REO Agreement with Bank, Fair Housing Organizations
On June 6, HUD announced an agreement to resolve an administrative complaint filed last year by the National Fair Housing Alliance (NFHA) and numerous individual fair housing organizations alleging that a national bank engaged in discriminatory practices with regard to real estate owned (REO) properties. The complaint was one of several that followed an investigation conducted by the fair housing groups, which allegedly revealed that REO properties in predominantly minority neighborhoods are more likely to have maintenance problems and are less likely to have a “For Sale” sign than properties in predominantly white neighborhoods. The report suggested that poor maintenance practices and other alleged neglect can result in properties being vacant for longer periods and can increase the likelihood that a property eventually will be purchased by an investor at a discounted price, as opposed to an owner-occupier. Under the conciliation agreement, the bank will invest $39 million in 45 communities to support homeownership, neighborhood stabilization, property rehabilitation, and housing development. The bank also will (i) use a revised Real Estate Broker Procedure Manual and property inspection checklist, (ii) implement an enhanced training program for real estate brokers and agents who list REO properties, and bank staff responsible for managing REO properties, and (iii) extend the amount of time that individual REO properties will be available exclusively for purchase by an owner-occupant or a non-profit organization.
FHFA Announces REO Pilot Program Developments
On July 3, FHFA announced the selection of the winning bidders in its real estate owned (REO) pilot program, with the initial transactions expected to close in the third quarter of 2012. FHFA launched its REO pilot program in February 2012 and bids from qualified investors were sought during the second quarter of the year for roughly 2,500 single-family foreclosed properties held by Fannie Mae. According to FHFA, investors qualified for the bidding process after a rigorous evaluation, considering factors such as their financial strength, asset management experience, property management expertise, and experience in the geographic area of the available properties. In a February 27 press release announcing its REO pilot sales initiative, FHFA identified the locations of the available properties, including the Chicago and Los Angeles metro areas.
Federal Reserve Offers Policy Guidance for REO Rental Programs
On April 5, the FRB released a policy statement that reiterates its general policy that banking organizations should make good faith efforts to dispose of foreclosed properties, also known as REO properties, as soon as practicable. However, under current market conditions, the FRB explains that banking organizations may hold and rent residential REO properties within legal holding-period limits without demonstrating continuous active marketing of the property for sale provided suitable policies and procedures are followed. The guidance offers risk management and compliance considerations for renting REO properties, as well as specific expectations for large-scale REO rental programs. The FRB release also points out that REO rental properties may meet the definition of community development under the Community Revitalization Act (CRA), and, if so, a banking organization would receive favorable CRA consideration.