Wednesday, February 15th, 2012 at 10:21am

Why Freddie Mac Lied About Short Payoff Fraud

Posted by Ron Ballard

For nearly two years now we’ve heard Freddie Mac attacking private real estate investors who want to buy and resell short sale and REO properties as engaging in “fraud.” They have repeated this lie so much that it is accepted as “true” by many in the residential real estate industry, especially real estate agents receiving “risk management” training — even some law enforcement and regulatory personnel who SHOULD know better have been duped by the constant repetition.

For nearly two years now, I and many other real estate lawyers, investors, educators, and funders have been showing how the Freddie Mac statements are legally wrong. I first wrote about it on April 17, 2010 at

The Distressed Property Coalition (see ) was formed to disseminate and politically promote ACCURATE legal information about this and similar topics. In private email communications, Freddie Mac admitted to DPC that their definition of “short payoff fraud” was not a legal opinion but statement of a “business policy.”

Almost two years later, as a result of the work of DPC’s Washington representative, John Grant, the financial basis of that business policy has been revealed: Freddie Mac bet against the recovery of the real estate market (which is fostered by investor activity) in order to profit.

With the permission of John Grant, I’m re-posting his article which is published today at in the Washington D. C. newspaper Roll Call, which is widely read on Capitol Hill.

Many mortgage servicers (i.e., banks) repeat the Freddie Mac business policy as if it is a legal opinion and use the Freddie Mac affidavits which are designed to discourage private investors from spurring a recovery of the housing market. With this revelation about Freddie Mac, one can only wonder if other financial institutions in the mortgage industry have similarly been betting against a recovery in order to profit at the expense of homeowners, home buyers, real estate investors and short sale sellers.

Here’s John Grant’s article:


The recent revelation that Freddie Mac’s business unit has bet billions that home loan modifications would fail is shocking even to the most devout critics of the failed, taxpayer-funded entity. The transactions, known as “inverse floaters,” are not illegal. But rigging the housing market to ensure the investments deliver a profit might be.

In addition to being a bet against homeowners and the Obama administration’s litany of struggling programs designed to save homeowners and Freddie, the inverse floaters are a bet against the private housing market. The bets fail not only if loan modifications work, but also if private buyers purchase Freddie’s inventory of distressed property. And here’s where Freddie has a problem.

For more than a year, Freddie Mac has adopted numerous policies designed to prevent the private purchase of toxic assets and forced servicers to enforce these policies. Demands for unreasonable offers on short sales, delays in processing short sales, affidavits preventing resale of their properties after being rehabbed and deed restrictions on real-estate-owned properties restricting resale price are among the myriad obstacles private buyers face in trying to buy Freddie’s inventory.

Besides delaying the unwinding of the troubled entity, several of these policies may in fact be illegal. Restricting the ability of private buyers to resell their properties and attempting to dictate resale value constitute unreasonable restraint on alienation. In plain English, once Freddie sells one of its toxic assets, it has no standing in future transactions related to the property.

Freddie has attempted to justify these policies through a taxpayer-funded media campaign arguing that the act of buying, rehabbing and reselling a property constitutes a crime and is inherently an act of fraud. Both Freddie and Fannie Mae have worked with enforcement officials to convince them of this lie. To the embarrassment of these enforcement officials, Freddie left out one important detail: Every time it stopped a short sale, Freddie made money.

Congress has known of Freddie’s anti-private-market agenda and done nothing to challenge it.

Homebuyers who take the risk to buy Freddie’s toxic inventory and turn its mistakes into quality homes deserve better. These entrepreneurs are the job creators; their sweat rebuilds struggling communities, generates local and state tax revenues and increases home prices in the areas most affected by the housing crash. For their contributions, they have been criminalized by an entity that has lost and continues to lose billions of taxpayer dollars and has essentially made a bet against a housing recovery.

The inverse floater transactions are the smoking gun evidence of what is really going on inside Freddie Mac. Freddie’s policies toward purchasers of its distressed assets have been nothing more than a business decision cloaked in feigned and false concerns over fraud and taxpayer interests. Their multibillion-dollar bet makes that crystal clear.

Since placement in conservatorship, Freddie Mac has made fools of many: enforcement officials on a snipe hunt for “fraud” perpetrated by people who are simply rebuilding our communities; the Obama administration, which rolled out program after program while all along Freddie bet against those programs; Congress, which surrendered its oversight to the Federal Housing Finance Agency; and the FHFA, which believes a new program designed to sell Freddie’s assets to hedge fund managers will actually bring in more revenue than selling to local investors.

But most of all, Freddie has made fools of American homeowners.

Anyone who works in finance knows that the real test for what an investor thinks, what an investor believes, is found by watching where that investor puts its money. Freddie Mac’s policies have denied distressed homeowners the right to vacate their homes without a foreclosure. And its investment vehicle has found a way to profit from the misfortune of others.

Solutions to this are simple, but they take political courage.

Congress and the Obama administration must work together to end all the anti-private-market policies in place at Freddie. This will allow for an orderly, organic and fair unwinding of the failed institution.

To the extent that government programs are working, keep them in place to help homeowners. But let there be no doubt that recovery and rebuilding American communities means private investment and local boots on the ground. That is a prescription for recovery no one should bet against.

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