California attorney general’s office subpoenas Fannie, Freddie

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.

The two mortgage giants are responsible for about 40% of home loans in the U.S., according to Inside Mortgage Finance.

“I think that this is at least partially an attempt to penetrate that bubble which is hanging over half the market,” Cecala said. “The servicers, the big banks they are dealing with and negotiating with, have no control over the loans that are guaranteed and effectively owned by Fannie Mae and Freddie Mac; the major banks are just third-party contractors when it comes to those.”

State investigators will be looking at three broad areas of practices by Fannie and Freddie in California, according to the person familiar with the matter.

The first will be the two companies’ role as a landlord in the state, where the two own about 12,200 foreclosed properties. In the Los Angeles metro area alone, Fannie and Freddie hold about 2,000 foreclosed properties, and nearly 3,000 in the Inland Empire, according to data published by their regulator this summer.

The subpoenas ask the two companies to answer questions related to their role as the owners of these homes. Foreclosed properties that are neglected can result in blight and be a haven for criminals.

Fannie and Freddie are being asked to supply details about how the loans they own are serviced, how quickly they are foreclosed upon and what kind of relief is offered to homeowners, according to the person familiar with the matter. The questions seek to gain information about what servicers are doing and which are the worst performers.

The two companies own about 4 million loans in California amounting to about $793 billion in mortgages, according to Inside Mortgage Finance.

Investigators are also seeking to determine what role Fannie and Freddie played in selling or marketing mortgage-backed securities. The attorney general’s office has an ongoing probe into potential fraud committed in the so-called secondary market for mortgages that became popular during the boom and helped fuel the bubble in home prices. The office has subpoenaed Bank of America Corp. and Countrywide, as well as Citibank, in relation to this investigation, The Times has previously reported.

Fannie and Freddie have filed a lawsuit against 17 major banks, saying the companies were defrauded by those loans and securities. The attorney general wants to know whether what the two entities have uncovered in their own actions might assist her office.

Although the investigation might help California gain leverage in its efforts to help its homeowners, a direct legal battle seeking damages from the two entities would be difficult and potentially counterproductive, Cecala said, as they are being kept afloat by the federal government.

“They would hire the best attorneys, and you and I would pay for it as taxpayers,” he said. “You can’t really seek any damages out of them because it all comes out of Uncle Sam’s pocket.”

Although Fannie and Freddie may employ practices that run counter to the interest of borrowers as they seek to minimize costs and expedite foreclosures, California might have a more difficult time finding fault with the two companies’ actions as a landlord, Cecala said. The two companies set the “gold standard” in terms of servicing and disposing of distressed real estate, he said.

It also will be difficult to prove that any harm was done to investors, he said, as the loans they securitized are backed up by the government.

alejandro.lazo@latimes.com

jim.puzzanghera@latimes.com