Insights

On June 2nd the Massachusetts Attorney General sued the Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac"), as well as the Federal Housing Finance Agency (the "FHFA") as supervisor, regulator and conservator of both Fannie Mae and Freddie Mac. The key allegation in the suit is that Fannie Mae, Freddie Mac and the FHFA violated a provision in the commonwealth's 2012 foreclosure law that prohibits creditors from conditioning the sale of a foreclosed property to a tax-exempt organization on a requirement that the property not be resold (or rented) to the former homeowner.

Commonly referred to as the "non-profit buyback provision," § 35C(h) of Chapter 244 of the General Laws of Massachusetts was enacted as part of a package of statutes that is best known for containing the commonwealth's "right to modify" requirements. Under the non-profit buyback provision, creditors are prohibited from requiring as a condition of sale to a non-profit entity (or an entity controlled by a non-profit) that the non-profit cannot resell or rent the property to the foreclosed borrower. The statute defines "creditors" to specifically include Fannie Mae and Freddie Mac.

The complaint, filed in Suffolk Superior Court, alleges two specific policies employed by Fannie Mae and Freddie Mac violate the non-profit buyback provision. The first is an arm's length transaction requirement (the "ALT Requirement") applicable to the sale of foreclosed properties pursuant to which a purchaser of a property must affirm that there are no "agreements, understandings or contracts" that the borrower will remain in the property as a tenant or otherwise later obtain ownership of the property.

The second is the "make whole directive," which the complaint claims precludes either Fannie Mae or Freddie Mac from accepting anything less than the outstanding loan amount for a property from either the borrower or anyone who intends to sell or rent the property to the borrower. Such a policy would prevent a non-profit from purchasing the property for a fair market value amount that Fannie Mae or Freddie Mac would sell it to another third party. In support of this claim the complaint points to a preliminary injunction granted in December 2013 by the U.S. District Court for the District of Massachusetts, that prevented Freddie Mac from taking steps to sell the property or evict the former borrowers due to allegations that the "make whole directive" violated the non-profit buyback provision. See: Suero v. Freddie Mac, 2013 WL 6709001 (D. Mass. December 17, 2013).

Like Suero, the complaint filed by the Attorney General also alleges that the policies of Fannie Mae and Freddie Mac constitute an unfair and deceptive trade practice in violation of the Massachusetts UDAP statute (Chapter 93A). In addition to seeking a declaratory judgment that the ALT Requirement and the "make whole directive" violate the non-profit buyback provision, the complaint also seeks penalties of up to $5,000 per violation for each unfair or deceptive act or practice.

Although this particular suit is aimed at Fannie Mae and Freddie Mac, all creditors operating in Massachusetts should keep an eye on this litigation. Documented policies and procedures, or any undocumented practices dealing with post-foreclosure property sales should be evaluated to determine if they potentially violate the non-profit buyback provision. If your due diligence raises such a concern, appropriate remedial action should be taken immediately, for where the Attorney General has gone others are sure to follow.

Thomas P. Quinn, Jr. is a partner in the Massachusetts office of Hudson Cook, LLP. Tom can be reached at 774-365-4758 or by email at tquinn@hudco.com.