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Fannie to Set New Policy On Arbitration Clauses
Mortgages Must Allow Borrowers to Sue
By Caroline E. Mayer
Washington Post Staff Writer
Wednesday, February 4, 2004; Page E02
Fannie Mae will announce today that it will no longer invest in mortgages with clauses forcing borrowers to give up their right
The announcement comes two months after Freddie Mac issued a similar decision, saying it would not invest in mortgages that contain mandatory arbitration clauses, which require borrowers to refer all disputes to a third-party arbitrator.
Consumer advocates have long been pressing Fannie and Freddie -- the nation's largest funders of home loans -- to ban mandatory arbitration provisions in all mortgages. Businesses of all sorts have been adding these to almost every consumer contract in recent years, saying it's a faster and more efficient way to resolve disputes. But consumer advocates say such provisions protect firms from large jury verdicts, particularly in class-action lawsuits. They add that the process itself often favors of the company.
In the past, Fannie and Freddie have not accepted mandatory arbitration provisions on the majority of home loans, only on those for subprime borrowers, or those considered higher credit risks -- a distinction that particularly disturbed consumer advocates.
The announcement will be made as part of Fannie's campaign to increase homeownership and the stock of affordable rental housing.
Fannie will also announce major new initiatives to preserve affordable rental housing, including a $15 billion increase in debt and equity to buy, rehabilitate and replenish more than 300,000 affordable rental homes, especially multifamily units in older urban neighborhoods, by 2010. It will also offer $100 million in acquisition lines of credit to qualified preservation groups, and $1.5 billion to public housing authorities to preserve and revitalize public housing communities.
"This is more than doubling our previous efforts," said Fannie spokeswoman Janice Daue. It is part of the campaign with AARP, formerly known as the American Association of Retired Persons, to focus on affordable housing for the elderly.
"This is huge compared to what's in the field right now -- magnitudes bigger," said F. Barton Harvey III, chairman and chief executive of the Enterprise Foundation, a major financer of affordable rental and for-sale housing. "If structured in the right way, it will be critically important to keeping affordable housing in this country."
Consumer groups had been discussing a ban on mandatory arbitration provisions with the industry when Freddie made the surprise announcement in early December that it would no longer invest in any subprime mortgages that contained such a provision. The announcement came as Freddie was still reeling from its accounting scandal.
Industry officials estimate that about 10 percent of mortgages are subprime. Although Fannie and Freddie don't issue the loans, they buy about half of the subprime mortgage asset-backed securities issued by major lenders, consumer advocates say.
As a result, "their requirements will have a huge impact on the subprime market," said Eric Stein, president of the Center for Community Self-Help, a nonprofit community development lender.
"This will impact the marketplace because two of the biggest financial institutions in America are saying that mandatory arbitration is abusive," said Ira Rheingold, executive director of the National Association of Consumer Advocates, which includes many plaintiff lawyers. "This begins to tip the seesaw" and may encourage other companies to eliminate similar provisions, he said.
But attorneys representing banks and other companies that include these clauses in consumer agreements disagreed.
"It's significant only for lenders who sell loans to Freddie and Fannie," said Philadelphia attorney Alan Kaplinsky. "I don't think it will decrease the number of lenders using arbitration" for other purposes.
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