Collecting Debts on Dubious Foreclosures

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Credit Spencer Platt/Getty Images

In early 2012, when five big banks settled with government officials over foreclosure abuses in the housing bust, the settlement sum, $26 billion, was actually a small price for the banks to pay. It was small compared to the economic damage from the banks’ reckless lending and abusive foreclosures. And it was small compared to what the banks got in return.

The settlement talks originally revolved around robo-signing, whereby the banks routinely filed false court documents in an effort to speed foreclosures and, in the process, denied homeowners their due-process rights. When the settlement was done, it shielded the banks from government civil lawsuits not only for robo-signing, but also for other foreclosure wrongdoing, including improper denial of loan modifications, excessive fees that enriched banks but pushed homeowners into default, and conflicts of interest that led banks to foreclose on homes rather than rework troubled loans.

The settlement let the banks breathe a big sigh of relief. Homeowners were not so lucky.

Gretchen Morgenson of The Times reported recently that some borrowers who lost their homes in the bust are now being hounded for debts related to foreclosures that were based on unlawful robo-signed documents.

Fannie Mae, the mortgage finance giant, has hired private debt collectors to recoup deficiency judgments – the difference between what borrowers owed on their foreclosed properties and the amount Fannie received when it sold them off. The collection efforts – against several thousand people – are taking place in Florida, one of the hardest hit states for foreclosures and a hotbed of robo-signing, because the time limit under state law for filing deficiency lawsuits is approaching.

Fannie’s rush to collect is appalling on several levels. It appears not to have given much thought to whether it is entitled to collect on debts that arose from robo-enabled foreclosures. The answer has to be no. If the foreclosure was unlawful, how can it give rise to a lawful debt? A Fannie spokesman told The Times that it was pursuing only those borrowers who had the ability to pay but chose not to. The spokesman declined to say how Fannie determined that the targeted borrowers had the ability to pay.

One thing is known, however: Debtors who have been foreclosed on don’t tend to have tens of thousands of dollars lying around to pay up. If they did, they wouldn’t have lost their homes to foreclosure.

It is also well known that homeowners who lost their homes in the bust have been demonized from the start, as if they brought on themselves the unemployment that spiked and endured after the financial crisis, and that made so many mortgages unmanageable. The banks were rescued , no questions asked. But when it came to helping homeowners, the presumption by policymakers was that troubled borrowers were undeserving and had to prove otherwise. Not surprisingly, anti-foreclosure efforts were largely failures and the housing market in general is still not healthy.

Fannie’s debt collection efforts in Florida are of a piece with that harsh attitude—that failed approach.