Information is sought on the mortgage giants’ roles as landlords who own thousands of foreclosed properties in California. Also sought are details of their mortgage-servicing and home-repossession practices, a source says.

By Alejandro Lazo and Jim Puzzanghera, Los Angeles Times
November 16, 2011, 6:27 p.m.

Reporting from L.A. and Washington— Investigators with the California attorney general’s office have subpoenaed information from mortgage titans Fannie Mae and Freddie Mac as part of a wide-ranging inquiry into lending and foreclosure practices in the state.

The subpoenas ask the government-controlled finance companies to answer a series of questions about their activities in California, including their roles as landlords who own thousands of foreclosed properties. The attorney general’s office is also seeking details of Fannie and Freddie’s mortgage-servicing and home-repossession practices, according to a person familiar with the matter.

In addition, investigators want to learn more about the companies’ purchases and sponsorship of securities holding “toxic mortgages” in the Golden State, said the person, who was not authorized to speak on the matter and requested anonymity.

Fannie and Freddie declined to comment on the investigation. Shum Preston, a spokesman for state Atty. Gen. Kamala D. Harris, also declined to comment.

Edward Mills, a financial policy analyst at FBR Capital Markets & Co., said Harris has been the most aggressive state attorney general in trying to assist those borrowers who are “underwater” on their mortgages, owing more on their properties than they are worth.

The move to open an investigation into Fannie and Freddie, Mills said, is a creative way to potentially force policy changes from the mortgage giants over the objections of their regulator, the Federal Housing Finance Agency in Washington, which is headed by Ed DeMarco.

“She’s felt that Ed DeMarco has not done enough to help homeowners and has undue influence over what changes are put in place at Fannie and Freddie,” Mills said. “If he’s not going to make those changes, she’s going to force those through the courts.”

The California investigation comes as DeMarco and the chief executives of the two companies faced bipartisan outrage this week over multimillion-dollar salaries and large bonuses at the housing finance giants, which still owe the government a combined $150 billion in the largest financial crisis bailout.

Harris this month pushed for Fannie and Freddie to allow more principal reduction, which is the writing down of the loan balances of troubled borrowers.

“If Mr. DeMarco is unwilling to support principal reduction for these home loans in crisis, he should step aside for someone who will,” Harris said.

DeMarco, in turn, said Wednesday during his congressional testimony that the agency has determined that reducing principal on loans owned by Fannie and Freddie is not “the least-cost approach for the taxpayer” to keep homeowners from foreclosure. In addition, those reductions are not authorized under the law that allowed the firms to be seized, DeMarco added.

“I do believe we are taking all due effort to provide assistance to homeowners, and I do not believe I’ve been authorized to use taxpayer money for a general program of principal forgiveness,” DeMarco told lawmakers.

According to the person familiar with California’s investigation, the central question posed by the California investigators is: To what extent did the two mortgage giants contribute to the foreclosure crisis in California?

Fannie and Freddie hold a vast number of loans in California. The major banks that are employed to act on their behalf — collecting payments from borrowers, foreclosing or evicting borrowers or striking deals with homeowners to modify their mortgages — must adhere to their guidelines.

Harris has made investigating the foreclosure crisis and mortgage meltdown a priority during her first year in office, creating a Mortgage Fraud Strike Force this year. More recently, she has stepped out of negotiations with the nation’s five largest banks, conducted on behalf of state attorneys general across the U.S., saying that the banks were asking for too much legal release in return for too little aid to California borrowers.

The subpoenas, issued Tuesday, deal only with Fannie’s and Freddie’s activities in California. But the investigation could lead other states to look into the firms’ operations, said Guy Cecala, publisher of Inside Mortgage Finance.

“If for some reason California would be successful in any of this, it certainly would encourage other states to go after them because every state has Fannie and Freddie mortgages,” Cecala said.

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