Freddie Mac failed to go after foreclosed homeowners who owed more than $4.6 billion on their government-guaranteed loans, passing up the chance to seize second homes and cars from people who defaulted on their mortgage payments.
The company, rescued by the government along with Fannie Mae in 2008, neglected to refer 58,000 foreclosures to servicers for review to find borrowers with assets to repay deficiencies, according to a report from the Federal Housing Finance Agency Office of Inspector General in Washington. Among those not pursued were real estate investors and other borrowers who stopped repaying their loans while keeping up on other bills, according to the review. The mortgages were all secured by homes in states where post-foreclosure collections are allowed.
Targeting strategic defaulters, those who choose to stop paying on a house that’s losing value, serves as a deterrent to borrowers considering walking away to escape bad real estate investments, according to the report. To set an example, they should be pursued even though recoveries may be only a fraction of the amount owed, the audit said.
“These are pennies on the dollar, but it sets an example,” Frank Pallotta, managing partner at Loan Value Group, a mortgage consulting firm in Rumson, N.J., that advises lenders on avoiding strategic defaults. “There’s a contagion effect that kicks in when people who are underwater see their neighbors walk away without having to give up cars or boats or vacation homes.”