BOSTON (Legal Newsline) - Massachusetts Attorney General Martha Coakley sent a letter on Thursday to government-sponsored mortgage companies Fannie Mae and Freddie Mac stating that they must offer commercially reasonable loan modifications.
The state of Massachusetts recently passed a loan modification statute requiring the companies to offer the modifications. In the letter sent to Edward J. DeMarco, the acting director of the Federal Housing Finance Agency, Coakley also urged the agency to reconsider its position and engage in principal reduction for borrowers who are struggling.
The loan modification statute, signed by Governor Deval Patrick on Aug. 3, requires that creditors take commercially reasonable steps to avoid certain mortgage loans from entering foreclosure. The FHFA, which manages the two mortgage giants, officially refused to engage in principal forgiveness.
"We expect Fannie Mae and Freddie Mac, like all creditors, to comply with these statutory obligations as they conduct business in Massachusetts," Coakley said. "Specifically, we expect that Fannie Mae and Freddie Mac will pursue common-sense loan modifications for borrowers when the economic benefits of a modified loan exceed the significant losses anticipated at foreclosure. These loan modifications are critical to assisting distressed homeowners, avoiding unnecessary foreclosures, and restoring a healthy economy in our commonwealth."
The letter highlights the crucial nature of preventing unneeded foreclosure and the agency's refusal to use principal reduction as a tool to avoid foreclosure.
The FHFA decided not to implement the Home Affordable Modification Program Principle Reduction Alternative after conducting a study that concluded that principle reduction leads to a 20 percent reduction in the likelihood of re-default compared to utilizing forbearance and that it causes 24 percent fewer re-defaults when compared to a modification receiving payment reduction without forbearance or forgiveness.
Coakley urged the FHFA in February to engage in loan modifications guided by a net-present value analysis to stabilize the economy and the housing market. In April, Coakley and 10 other state attorneys general sent a letter to DeMarco seeking relief for struggling homeowners. The letter argued that homeowners and investors are harmed by failing to implement principal loan forgiveness.