East Orange has stepped to the forefront of a national push to make mortgage giants Fannie Mae and Freddie Mac slow their sales of troubled home loans to Wall Street banks and investors.
East Orange Mayor Lester Taylor and Councilman Chris James are actively protesting against the two federal agencies for choosing to sell bad mortgages to Wall Street instead of opening the process to nonprofits that would try to keep the properties from being foreclosed.
Taylor and James believe Fannie Mae and Freddie Mac are undermining neighborhood stabilization efforts when they sell to these investors. As city officials work with nonprofits to help residents stay in their homes, by selling to Wall Street investors, the two government-sponsored entities are, in effect, shifting the mortgages to investors likely to foreclose, they said.
The issue has particular resonance in New Jersey. Even as the foreclosure crisis has receded in most of the nation, the state remains a sore spot. As the largest players in the nation's mortgage markets, Fannie and Freddie own or guarantee many loans whose borrowers have fallen behind on payments.
What happens next can make the difference between whether local residents can get back on their feet or must move out of their neighborhoods, sometimes leaving vacant homes and diminished tax revenues, according to James.
"We want Fannie and Freddie to work with the city and our nonprofits" to help residents avoid foreclosure, James said. "No one really knows what their process is."
In response, Fannie (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp.) said their sales of troubled mortgages reduce taxpayers' liability for bad loans they made in the run-up to the Great Recession. They point out that they already have tweaked policies to sell more mortgages to nonprofits.
To the critics in East Orange and other cities dotted around the nation, the changes are minor. So far, the GSEs have sold dozens of mortgage notes to nonprofits, but tens of thousands to investment banks, hedge funds, and private-equity groups.
Nonprofit bidders are "just getting access to a small pool of loans, but Wall Street is getting access to a large pool," said Trina Scordo of New Jersey Communities United, which supports East Orange.
Who buys the mortgage note can have significant consequences for the borrowers. The U.S. Department of Housing and Urban Development highlighted the impact in a 2014 analysis of its own sale of troubled mortgages. Some 80 percent went to investment banks, hedge funds, and private-equity groups, the report said. But when nonprofits bought the loans, borrowers were three times more likely to be able to keep their homes, HUD found.
In the debate over how the sales program should work, Fannie, Freddie and their critics largely agree on the facts, but come to different conclusions.
Both sides point to the success of nonprofit New Jersey Community Capital Community, which has bought troubled mortgages from Fannie Mae and HUD. NJCC then attempts to work with borrowers, offering mortgage modifications to help them keep their homes.
New Jersey still has the highest percentages among the states of homes in foreclosure or with overdue mortgage payments, according to a February report by the real-estate analytics firm CoreLogic of Irvine, CA.
State court records show almost 42,000 new foreclosure cases were filed in New Jersey last year. That is down more than half from the 2009 peak, but up more than half from pre-recession 2005.
Many of those cases affect Fannie Mae, which owns or guarantees roughly half of the nation's $13.5 trillion mortgage market. Of that, household mortgage debt accounted for $8.25 trillion at the end of last year, according to aby the Federal Reserve Bank of New York.
Since the housing bubble burst in 2007 and property values plummeted, many East Orange residents have been stuck underwater, with mortgage debt higher than the worth of their homes, James said. By selling off mortgages to investors, Fannie and Freddie are further destabilizing the very neighborhoods where municipal officials and community groups are trying to keep people in their homes, he said.
"We have residents who are still in the process of trying to refinance mortgages, and still getting the same runarounds from lenders, 'Oh, we don't have the paperwork,'" James said. "That's been going on for years."
The city's Neighborhood Housing and Revitalization has been in "direct contact" with Fannie Mae about troubled mortgages, said spokeswoman Connie Jackson. She said the enterprise currently lists numerous delinquent mortgages in East Orange: 189 by two months, 254 by three to 24 months, and 66 by more than two years. The Hope Now association, whose members include major banks, reports 182 properties in foreclosure in the city, she said.
The largest mortgage issuer and forecloser in the state, Wells Fargo, declined to provide numbers, but acknowledged considerable activity in East Orange, Jackson said. Even without that bank's foreclosure properties, the numbers are significant in a city with roughly 6,500 owner-occupied homes.
The two GSEs were founded in 1938 (Fannie) and 1970 (Freddie) to expand the mortgage market. They buy mortgages from lenders, then package them into securities sold to investors. But once Congress and President Bill Clinton lifted Depression-era controls, banks began issuing their own mortgage-backed securities, recording them, and transferring them through a private computerized system.
Seeking new investment products, banks made increasingly bad loans, often at onerous terms, to poorly qualified borrowers and with false or misleading risk analyses. Trying to maintain their business, Fannie Mae and Freddie Mac plunged into this market although they no longer controlled the quality of their purchases.
When the bad loans began to go belly up and the housing bubble burst, Fannie and Freddie were among the many financial institutions bailed out by the federal government. The Federal Housing Finance Agency was appointed conservator in 2008, overseeing their operations and efforts to reduce their liabilities.
To get out of that hole, the two GSEs increasingly have turned to selling off their distressed mortgages. During the second half of 2015, Freddie Mac reported auctioning 15,790 nonperforming loans valued at more than $3 billion. That was up from 3,044 at $656 million in the last six months of 2014.
There is no dispute that successful bidders generally have been investment banks and hedge funds. For the GSEs, that means balancing the books. Last year, they reported net income of $11 billion for Fannie and $7.7 billion for Freddie.
Those buyers have been able to purchase the mortgage pools at deep discounts from the face value of the loans, terms generally not available to struggling residents, James said.
"The process hasn't been open," he said, adding that before a recent auction, "the city couldn't find out when it was, or if any properties in East Orange were included."
But Freddie Mac spokeswoman Lisa Gagnon said procedures for selling nonperforming loans are "transparent, competitive" and subject to Federal Housing Finance Agency rules. The FHFA requires "prioritization of non-foreclosure resolution, with borrower retention strategies at the top of the evaluation waterfall," she said.
"We're completely agreeable to their need to clear losses," said Amy Schur of the Alliance of Californians for Community Empowerment. "We're not saying don't sell them, but we think they should find responsible purchasers."
Schur's group helped organize events where elected officials from her state, East Orange and Brooklyn, NY joined by individual office-holders and community groups from other cities, embraced the slogan, "Don't sell our housing to Wall Street."
In September, Lester and James joined Sen. Elizabeth Warren (D-Mass.) for a Washington rally to promote policy changes by Fannie and Freddie. The two followed by networking with municipal officials around the country to broaden the lobbying effort.
But Gagnon said any qualified bidder can pursue the larger pools, because "all of our deals are marketed to a broad investor group, including smaller investors, nonprofits, neighborhood advocacy groups" and minority and woman-owned businesses. The smaller pools may be more attractive to nonprofits with limited resources and give them two more weeks to raise money and bid, she said.
A week after the East Orange protest, Fannie Mae sold 6,540 mortgage notes to Carlsbad Funding Mortgage Loan Acquisition, Pretium Mortgage Credit Partners, and a Goldman Sachs subsidiary. Last week, it sold 60 in the Miami area to New Jersey Community Capital.
In 2012, the organization with offices in New Brunswick and Newark was the first to obtain troubled mortgages from HUD. It bought 150 in Essex County and 249 in the Tampa Bay area of Florida, where officials had sought its help. Three years later, it won Fannie Mae's first "community impact pool," tailored for nonprofits and small bidders, of 71 more mortgages in Florida.
"We’re pleased that New Jersey Community Capital continues to be an active participant in our non-performing loan sales as part of their continuing efforts to help stabilize neighborhoods,” Joy Cianci, a Fannie Mae senior vice president, said last week. “This sale was designed to give homeowners as many options as possible to avoid foreclosure.”
Gagnon cited a January report by the Urban Institute, a think tank established under the administration of President Lyndon Johnson to evaluate urban policies. The authors, well-known Wall Street housing analysts Dan Magder and Laurie Goodman, who also directs the institute's housing finance policy center, concluded "the loan sales are good for HUD and good for taxpayers."
Moreover, since mortgage payments on the properties averaged 29 months overdue, the authors said that "in the absence of the loan sale program, the loans in these pools were very likely to go to foreclosure because all their other options had been exhausted."
Goodman and Magder conclude that of the mortgage situations resolved after HUD sales, almost half have avoided foreclosure. But that number is optimistic, since the data shows borrowers have lost more than half of those "saved" homes through short sales or surrendering their deeds.
To James, that supports the contention that the GSEs should work to provide more advanced information to municipalities about mortgage pools, make it easier for them to target local properties and give them more time to work with nonprofit and private-sector partners to raise capital for bids.
"We're thrilled at the opportunity" to participate, said NJCC President Wayne Meyer.
But his deputy, Peter Grof said the group has been working with East Orange, and understands local officials' frustration about finding what local mortgages, if any, are going into what auction pools.
"It's not a black box, but they play their cards close to the vest," Grof said.