Despite Increased Costs Of Doc Reviews, Freddie Notes ‘Difficulty’ Of Enforcing Contractual Rights


Foreclosure suspensions instituted in response to servicers' documentation problems will delay the sale of Freddie Mac real estate owned properties (REOs) and translate into higher expenses for the government-sponsored enterprise. Despite this, the company has expressed a reluctance to enforce its contractual rights against servicers.

Freddie Mac, which on Wednesday announced a third-quarter loss of $4.1 billion, had almost 75,000 units in its REO inventory at the end of September. Though the flow of properties into REO increased during the third quarter, the timing and volume of future REO activity could be adversely affected by foreclosure-process deficiencies, Freddie Mac says.

The company notes that deficiencies in the foreclosure process have called into question the validity of Freddie Mac's acquisition and disposition of REOs. Further delays in sales will raise the holding costs associated with property preservation. If home prices decline, then Freddie Mac stands to lose money by selling properties in a weaker market.

In a filing with the Securities and Exchange Commission Wednesday, Freddie Mac suggested it is unlikely to go after servicers for the losses caused by flawed paperwork.

‘While we believe that our seller/servicers would be in violation of their servicing contracts with us to the extent that they improperly executed documents in foreclosure or bankruptcy proceedingsâ�¦it may be difficult, expensive and time consuming for us to enforce our contractual rights,’ the company said. ‘Our efforts to enforce our contractual rights may negatively impact our relationships with these seller/servicers, some of which are among our largest sources of mortgage loans.’

The processes that servicers are undertaking to remedy their document execution problems will further strain shops' resources, which, Freddie Mac notes, could negatively impact servicers' ability to service Freddie Mac loans.

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