BOSTON (CN) - Massachusetts sued Fannie Mae and Freddie Mac to try to force them to follow a state law to help distressed homeowners who may lose their homes to foreclosure.
Massachusetts sued the Federal Housing Finance Agency (FHFA), Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae), in Suffolk County Court.
The state claims the federal mortgage lenders unlawfully refuse to sell homes in foreclosure to nonprofits that intend to resell or rent them to the former owners.
FHFA supervises and regulates Fannie Mae, Freddie Mac and 12 federal home loan banks. It also is conservator for Fannie Mae and Freddie Mac, which own or guarantee about half of the residential mortgage loans in the United States.
Massachusetts in 2012 passed a law designed to prevent unnecessary residential foreclosures and protect "those borrowers in Massachusetts with the riskiest, most expensive and least sustainable subprime mortgage loans," according to the lawsuit.
The law requires creditors to prove they can legally foreclose on a secured property and to offer home loan modifications to qualified borrowers before initiating foreclosure.
It also bars creditors from refusing to sell a property under foreclosure to nonprofit groups that intend to sell or rent the property back to the homeowner.
"In addition to this legislative action, various Massachusetts community leaders and nonprofit groups have devised programs to stabilize vulnerable neighborhoods and address the blight caused by large numbers of foreclosures," the complaint states. "These efforts have been directed to 'hardest hit' neighborhoods, including areas with the largest volume of distressed mortgage loans and abandoned homes, and with high percentages of 'underwater' borrowers (borrowers whose mortgage loan indebtedness exceeds the current value of their home). Some nonprofit groups offer programs to purchase homes in these areas at their current fair market value, either post-foreclosure or otherwise, and then sell (or rent) the property back to the original homeowner, provided the homeowner financially qualifies." (Parentheses in complaint).
The state claims that federal mortgage lenders, which qualify as "creditors" under the law, refuse to deal with nonprofits that give homeowners an opportunity to buy back or lease their homes.
Federal lenders have an "arm's length transaction" requirement, under which buyers must testify that they will not let borrowers buy back their homes post-foreclosure, according to the lawsuit.
"In addition, defendant FHFA has issued the so-called 'make-whole' directive, which precludes the GSEs [government-sponsored enterprises] from accepting anything less than the outstanding loan amount from the former homeowner or anyone intending to sell or rent to that person," the complaint states. "The GSEs thus refuse to sell at fair market value to a nonprofit that may sell or rent to the former homeowner, instead requiring a (higher and non-market) price that is equivalent to the outstanding loan amount." (Parentheses, but not brackets, in complaint).
Massachusetts claims that the federal lenders refused to change their policies to comply with state law.
Rather than accepting offers from legitimate nonprofits that offer "buyback" programs, the government-sponsored lenders continue to foreclose on homes and evict residents, according to the lawsuit.
The state claims the lenders would accept fair market value offers from any other buyers, but not from nonprofits offering buyback options.
Massachusetts courts have recognized claims based on violations of the nonprofit buyback provision, and have enjoined foreclosures and evictions in violation of the law, according to the lawsuit.
"By maintaining these policies in Massachusetts, defendants are knowingly violating a state law intended to protect consumers, rebuild hard-hit communities and advance the public interest," the lawsuit adds.
The state seeks an injunction and damages for state law violations and unfair and deceptive business practices.
It is represented by Claire Masinton.
"It makes no sense for our federal government to stand in the way of this work to help struggling families stay in their homes, and it is illegal for Fannie and Freddie to do this in Massachusetts," Attorney General Martha Coakley said in a statement. "For too long, Fannie and Freddie have been roadblocks to progress in addressing this foreclosure crisis, and I urge them to immediately reverse their policy on this common-sense program."
The FHFA said it does not comment on pending litigation.