Whistleblower: Fannie Mae bungled HAMP anti-foreclosure program

Introduction

Fannie Mae executives bungled their stewardship of the federal government’s massive foreclosure-prevention campaign, creating a bureaucratic muddle characterized by “mismanagement and gross waste of public funds,” according to a whistleblower lawsuit by a former Fannie Mae executive and consultant.

Caroline Herron, a former Fannie vice president who returned to the mortgage giant in 2009 as a high-level consultant, claims that the homeowner-relief effort was marred by delays, missteps and executives preoccupied with their institution’s short-term financial interests.

“It appeared that Fannie Mae officers were focused on maximizing incentive payments available to Fannie Mae under various federal programs – even if this meant wasting taxpayer money and delaying the implementation of high-priority Treasury programs,” she claims in the lawsuit.

Herron alleges that Fannie Mae officials terminated her $200-an-hour consulting work in January because she raised questions about how it was administering the federal government’s push to help homeowners avoid foreclosure, known as the Home Affordable Modification Program, or HAMP.

Fannie Mae signed a $113 million contract with the U.S. Treasury Department in February 2009 to administer HAMP. Fannie’s leaders have acknowledged they face challenges in running the program, but have said “we are committed to getting the job done, which is to help as many borrowers as possible if they are struggling to make housing payments.”

Fannie Mae declined to respond to specific questions from the Center for Public Integrity about Herron’s allegations or about its administration of HAMP. In a written response, a Fannie Mae spokeswoman said Herron’s attorney had “notified Fannie Mae in early March of her potential allegations. Upon learning of these allegations, Fannie Mae retained a former Inspector General of the Department of Justice to conduct an independent investigation. Ms. Herron was invited to participate in that investigation but she declined to do so. The investigation found no merit to her allegations.”

The spokeswoman would not provide details of the investigation or a copy of the investigator’s report. “Fannie Mae will not comment further to the press on the details of this pending litigation,” she said.

Fannie saw HAMP as way to repair reputation

Fannie Mae has had some rocky times in recent years, from an accounting scandal to a near-death experience as the nation’s financial crisis reached a boiling point. Regulators concluded that Fannie’s strong financial results from 1998 to 2004 “were illusions deliberately and systematically created” by senior managers through bookkeeping tricks that helped boost their bonuses and other compensation. In September 2008, Fannie and another federally chartered mortgage company, Freddie Mac, were put into government conservatorship amid market panic and losses from bad mortgages they had bankrolled. The bailout tab for the two has now reached at least $145 billion, and the Congressional Budget Office estimates it could eventually top $380 billion.

Signing a contract to run the Obama administration’s $75 billion mortgage-relief effort gave Fannie a chance to repair its reputation and show that, despite its stumbles, it could be an effective steward of the mortgage market.

More than a year into the creation of HAMP, however, Fannie Mae, the Treasury Department and loan servicers are facing questions about whether they’re doing enough to help homeowners in trouble.

Neil Barofsky, a special inspector general appointed to oversee government bailout programs, said in a report to Congress that “HAMP has not put an appreciable dent in foreclosure filings.” Despite its original goal of saving three million to four million homeowners from foreclosure, Barofsky reported in April, HAMP permanently modified little more than 230,000 mortgages in the program’s first year – the equivalent of 8 percent of new foreclosures filed in 2009 alone.

“It’s not working,” the Rev. Eugene Barnes, board president of National People’s Action, an advocacy group that has worked to push banks to rework borrowers’ mortgages, told the Center for Public Integrity. “Many homeowners who could have been helped by HAMP have not been helped by HAMP. Either they are going to lose their homes or just walk away.”

In testimony before a Senate subcommittee in late April, Treasury Secretary Timothy Geithner said that his department had made improvements that will allow HAMP to reach more at-risk homeowners. He promised to get tougher on servicers who haven’t held up “their end of the bargain,” saying that his department was “troubled by reports that servicers have foreclosed on potentially eligible homeowners” and are not responding to the needs “increasingly desperate homeowners.”

Insider’s account of what happened with HAMP

Amid all the public concern, Caroline Herron’s lawsuit provides something that is exceptional: an account from a former insider who is willing to tell her version of what was going on behind closed doors within the government’s mortgage-assistance program. Herron declined to comment for this article, but her claims are laid out in detail in her 39-page legal complaint in U.S. District Court in Washington, D.C.

Herron worked at Fannie Mae from 2000 to 2007. In her last 16 months there, she served as vice president for “SOX strategy and execution,” earning around $400,000 a year helping Fannie comply with the Sarbanes-Oxley corporate reform law and complete a multi-billion-dollar restatement of its earnings. Herron says she left Fannie on good terms after taking a buyout as part of a company-wide downsizing. A former Fannie executive who worked with Herron, speaking on the condition of anonymity, described Herron as “very professional. . . . Her work product was excellent. She brought a lot of integrity to what she did. If I could work with her again, I would.”

After coming back as consultant in July 2009, Herron says she worked as project manager on two HAMP initiatives. One was an effort to modify homeowners’ second mortgages. The other involved a push to create an online portal that would help distressed homeowners link up with the big banks and other “loan servicers” that were responsible for collecting on their loans.

One issue inside Fannie was its push to put as many borrowers as possible into short-term trial modifications, at the expense, Herron maintains, of getting qualified borrowers into permanent modifications.

Herron charges that Fannie Mae continued in headlong pursuit of “trial mods” even though it knew many had little chance of becoming permanent. As late as September 2009, barely 1 percent of trial modifications had converted to permanent modifications by the end of their three-month trial, a Congressional oversight panel found. Nevertheless, Fannie preferred doing trials, Herron alleges, because it was eligible to receive incentive payments from the Treasury Department for trial modifications it booked before the end of 2009.

As of February 2010, 83 percent of the 1 million active modifications being handled by HAMP were trials rather than permanent arrangements. Barofsky, the special inspector general, criticized HAMP’s focus on trial modifications in a recent report.

“If HAMP ends up being a foreclosure mitigation program that merely delays foreclosures rather than preventing them, the program will be of questionable value, particularly in light of the huge investment of taxpayer funds,” Barofsky wrote. “A program that helps borrowers permanently avoid foreclosure is preferable (and far less wasteful of taxpayer dollars) to one that merely kicks the proverbial foreclosure can down the road.”

Computer tool to help borrowers

Another issue for Herron – and for some people outside Fannie Mae – was how Fannie and Treasury handled a technology project aimed at helping to break the logjam of homeowners struggling to document and complete their modification requests.

The idea was to create a so-called “borrower portal,” an online gateway where borrowers seeking modifications could enter their financial information and upload key documents. By storing documents on a secure server and creating a digital paper trail, the project’s advocates hoped the portal would end the “he-said, she-said” disputes between borrowers and loan servicers over missing documentation that frustrated efforts to rewrite millions of mortgages and keep families in their homes.

Jack Guttentag, a Wharton School professor of finance emeritus who writes The Mortgage Professor’s Web Site, has advocated harnessing the power of the web to help borrowers and mortgage counselors file loan-mod applications. That would make it possible for loan servicers to complete in one day a decision-making process that, because of paperwork snafus and servicer ineptitude, “takes weeks or months and often doesn’t get done at all,” he says.

In July 2009, Default Mitigation Management, a Newport, Ky., company, demonstrated its loan portal to Fannie officials, according to Igor Roitburg, the company’s chief operating officer. Roitburg says his company had developed a portal that was already used by some mortgage counselors to help distressed borrowers and, with a few tweaks, could have helped borrowers communicate directly with their loan servicers. “We were ready to go,” Roitburg told the Center.

Months went by, though, before Fannie issued a formal request for proposals from software developers. Then, around the start of 2010, Fannie and the Treasury Department abruptly canceled the bidding process. In a letter to U.S. Rep. Geoff Davis of Kentucky, a top Treasury official explained that as the bidding process neared its end, Fannie identified a need for “broader capabilities” in the portal and “determined not to move forward with a borrower portal at that time.”

Herron’s lawsuit accuses Fannie executives of “actively working against” the borrower portal idea. Fannie was reluctant to move quickly to make it easier for homeowners to provide extensive documentation to their loan servicers because it wanted to continue processing less-documented trial modifications, she alleges.

Roitburg says he is still mystified by the decision to drop the project.

“There is no way to solve this crisis without solving the documentation issue,” he says. “It’s a systemic failure, and Fannie has known it’s a systemic failure, and they’ve just turned their back on the solution.” Guttentag, the Wharton professor emeritus, contacted Treasury officials in January to complain that he was “frustrated and angry” with the agency’s decision to end a project that could have helped beleaguered borrowers navigate what he called the “modification obstacle course.”

A Fannie spokeswoman referred all questions about the portal to the Treasury Department. A Treasury spokesman did not reply to repeated requests for a response to questions about Fannie’s performance as a HAMP administrator, or about the decision to abandon the borrower portal initiative.

Borrowers’ portal launched by nonprofit groups

With Fannie and Treasury out of the game, others have taken the lead in creating loan-mod portals. HOPE NOW, a partnership between the mortgage industry players and nonprofit mortgage counseling groups, has created a portal that can be used by counselors working on behalf of borrowers. Loan servicers responsible for roughly 70 percent of outstanding mortgages have agreed to use the portal, though at this point usage has remained low.

Larry Gilmore, chief executive of the HOPE LoanPort, said that as of last week roughly 1,600 cases had been entered into the system, with about 700 having already been pushed to loan servicers for consideration.

Herron’s lawsuit claims she was terminated soon after Fannie dropped the portal idea. She had hoped to shift her consulting work to the Treasury Department, but, she alleges, Fannie Mae officials “blackballed” her “in order to send a signal to other Fannie Mae employees not to get too close to Treasury, or to provide Treasury with an independent source of unbiased advice and information.”

One top Fannie executive, her lawsuit says, indicated he was worried that she might “be mean to Fannie Mae” after moving over to Treasury Department.