Fannie Mae, Freddie sued over alleged excessive fees

Nation's Housing

February 20, 2005|By KENNETH HARNEY

HAVE THE two biggest providers of American home mortgage money charged consumers and lenders billions of dollars in artificially inflated loan fees since 2001? Have you been paying more than you should on your mortgage as a direct result?

Congressional committee leaders are investigating that possibility, and a federal regulatory agency has gathered preliminary data suggesting overcharges could have occurred.

The answers aren't in yet on Capitol Hill, but homeowners in two states aren't waiting. They have filed federal class action lawsuits charging that mortgage giants Fannie Mae and Freddie Mac have conspired to pad their corporate bottom lines by setting artificially high loan fees that get passed on to individual homebuyers.

Freddie Mac vigorously denied that it has overcharged anybody or engaged in agreements to do so. Fannie Mae declined to comment.

Even before the latest round of accusations, both corporations were in hot water with Congress, the Justice Department, the Securities and Exchange Commission and even their shareholders over alleged accounting abuses and the compensation paid executives.

But the latest allegations of bloated loan fees could ratchet up the political pressure on Fannie and Freddie even more. Here's a quick guide to what the flap is all about.

Both corporations are congressionally chartered, private enterprises that buy billions of dollars of new mortgages every month, then package them into bonds for sale in the global capital markets. Fannie and Freddie guarantee bond investors steady payments of principal and interest from the underlying mortgages, even when homeowners fall behind or go into foreclosure.

For that guarantee, the two companies charge lenders a "g-fee" that has varied in recent years between almost one-quarter of 1 percent and one-fifth of a percent, according to data assembled by the Office of Federal Housing Enterprise Oversight, their principal regulator.

G-fees add about $500 to the annual mortgage outlays paid initially by a homebuyer with a $250,000 home loan, according to a class action filed last month in the U.S. District Court for the District of Columbia by Jason Guttman, a homeowner from Norwalk, Conn. Over the full term of that size mortgage, the typical g-fee adds about $11,350 to the homebuyer's costs. A similar suit was filed by homeowners in Wisconsin.

Guarantee fees should vary with the actual losses Fannie Mae and Freddie Mac experience from making payments for delinquent and foreclosed homebuyers, according to Guttman's suit. Yet data assembled by their federal regulator indicate that Fannie's and Freddie's losses have plummeted since the late 1990s while their g-fee rates have remained roughly the same.

In 1995, for example, Freddie Mac had credit losses of 11 percent on its guaranteed loan pools, but charged lenders an average g-fee slightly higher than it did in 2003, when its losses were just 1 percent. Fannie Mae's fees and loss ratios followed a similar pattern.

The continuation of high fees from both companies was not coincidental and led to record g-fee revenues of $4 billion last year, according to the suit. The "lock-step" pattern of inflated fees was the product of an illegal "conspiracy to stabilize g-fees."

"Since 2001," charged Guttman, Fannie and Freddie "have secretly met with lenders" to discuss g-fees and other terms. "Lenders ... were and continue to be required to sign a statement vowing to keep the terms secret. Lenders are, therefore, forbidden and intentionally do not reveal g-fee rates to consumers." That, in turn, constitutes "a deceptive practice which violates the consumer protection statutes" of all 50 states, the lawsuit contends.

Freddie Mac spokeswoman Sharon McHale said the "secret" meetings were nothing unusual. The company privately "negotiates [terms of loan purchases] with individual lenders" as a standard business practice "that is in complete compliance with the law."

Guttman's suit seeks triple damages for all homebuyers whose loan payments contain a g-fee set by Fannie or Freddie between Jan. 1, 2001, and the present - potentially millions of consumers.

But don't look for a refund check in the mail anytime soon. The underlying issues on g-fees are complex and neither company has had its day in court. Far more likely is a new focus in Congress: Complaints from small and midsize lenders that they are forced to pay much higher g-fees to Fannie and Freddie than big lenders pay. That could make smaller lenders' rate quotes to homebuyers less competitive than quotes from big lenders - further concentrating control of the mortgage market into fewer hands.

And if those high fees to small lenders bear no relation to credit losses on their loans, but simply help pay for discounts to bigger lenders, then Fannie and Freddie may indeed have a problem on Capitol Hill.

Harney's e-mail address is KenHarney@earthlink.net .

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