January 30, 2023 — Report

A Call for Reform

By: Andrea Bopp Stark, Alys Cohen, Steve Sharpe, Geoff Walsh

Congress has charged the housing giants Fannie Mae and Freddie Mac (the government-sponsored enterprises or GSEs) with the goals of supporting and expanding homeownership. Yet, during the COVID-19 pandemic, the Federal Housing Finance Agency (FHFA), Fannie and Freddie have undercut—and continue to undercut—these goals through bulk sales of hundreds of thousands of home loans to investors, thereby ending these borrowers’ access to the streamlined loss mitigation programs the agencies created to help financially struggling homeowners save their homes.

Instead of accessing GSE loss mitigation offerings and their clear eligibility rules, borrowers whose loans are sold are left with weak and opaque options developed by the investors who take over these loans. For example, many borrowers harmed by the pandemic who were told they could apply for GSE loss mitigation programs to put their missed payments at the end of the loan were blindsided by a new servicer who explained that those options were no longer available because the new owner of the loan did not offer them. GSE guidelines that describe the loss mitigation options that the buyer of the loan must offer are so vague and weak that they do not ensure meaningful home retention options will be available.

Compounding this issue is the lack of accurate, comprehensive data about the outcome of sold loans. In fact, there is no data publicly available for the more than 545,000 reperforming loans sold. We do not know anything about their performance or what loss mitigation options have been offered or provided postsale for those that re-defaulted. And, while the FHFA has published data on nonperforming loan sales, it is based on an outdated control group and does not reflect accurate conclusions based on today’s market. The FHFA and GSEs do not have sufficient data to fully understand what happens to the loans once the loans are sold.

It is concerning that these sales have continued during the pandemic, cutting borrowers off from sustainable GSE COVID options when they need them the most. Borrowers of color have been disproportionately harmed by the pandemic and have needed more time in the forbearance program. They have remained in default on their mortgages longer. The sale of these borrowers’ loans, and the resulting significant loss of home-retention options, undermine the goals of the recently established GSE Equitable Housing Finance Plans to create and preserve home ownership for borrowers of color. Continuing to conduct note sales deviates from this mission and ignores the potentially devastating effect of these sales on borrowers, particularly those hit hardest by the COVID pandemic.