I’d rather not even comment on the latest leak from the “I’m not dead yet” foreclosure fraud settlement talks. That trial balloon about allowing underwater borrowers to refi on bank-owned loans that I mentioned yesterday? Turns out that is being offered in exchange for more immunity for the banks. Marcy has the story.

This is being done, I suspect, to entice Kamala Harris, whose state of California has 2 million underwater homes. Whether it will succeed is another matter. But anyway, Tom Miller was lying when he said that the immunity would be limited to robo-signing. Of course, we already knew that.

But there was some good news yesterday. For years, Fannie Mae and Freddie Mac used special lawyer networks to process foreclosures, made up of law firms who were flagrantly abusing their customers and violating the law. When Alan Grayson was in Congress, he demanded that Fannie and Freddie stop using these foreclosure mills. Thanks to an FHFA Inspector General report, we know that Fannie knew about the abuse of the foreclosure mills, including robo-signing, as far back as 2003. In fact, even after being informed of fraud and abuse by the foreclosure mills, they not only allowed them to continue operating on their behalf, but forbade their servicers from using any other law firms in foreclosure processing.

This has apparently come to an end, and if Fannie and Freddie are dumping the foreclosure mills, given their stature in the market, the mills are effectively out of business.

Fannie Mae and Freddie Mac will phase out their foreclosure attorney networks in the wake of the so-called robo-signing scandal, the companies’ regulator said.

The Federal Housing Finance Agency directed the companies to transition to a system that allows mortgage servicers to select their own law firms for processing defaults and foreclosures, rather than relying on a pool of attorneys designated by Fannie Mae or Freddie Mac.

The move is in line with an ongoing effort to establish uniform foreclosure processes at the two companies, the FHFA announced in a press release.

This is something that House Oversight Committee Democrats, particularly ranking member Elijah Cummings, sought for some time. He praised the action yesterday in a statement, but added caution.

“Several of these law firms were able to engage in abusive and illegal behavior that violated the rights of borrowers, in part because of deficient oversight by FHFA, Fannie Mae, and Freddie Mac,” said Cummings. “In light of the extensive problems recently documented by the FHFA Inspector General, I urged FHFA to seriously consider terminating these attorney networks, and it appears they are implementing my request.”

“I remain concerned, however, that FHFA has not provided specific details about how mortgage servicers will select and oversee law firms to ensure that abusive behavior is prevented,” added Cummings. “I will continue my oversight efforts to ensure that specific measures are in place to require mortgage servicers to properly oversee the actions of law firms conducting foreclosure proceedings, including those involving mortgages owned or backed by the government sponsored enterprises.”

I hope he keeps on this. Getting rid of the worst offenders, the foreclosure mills, cannot help but improve the process at the margins. Ultimately, it will take a wholesale overhaul of the servicing model, and with their share of the market, Fannie and Freddie have to take the lead on that. FHFA is taking a tentative step here. Better late than never.

David Dayen

David Dayen

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