Massachusetts Attorney General Martha Coakley sued federal housing regulators and the mortgage giants Freddie Mac and Fannie Mae on Monday, alleging they are violating state law by refusing to negotiate lower loan terms for distressed homeowners.
The mortgage companies won’t work with nonprofit organizations that are participating in a program that helps delinquent homeowners buy back their properties at lower market prices, the lawsuit suit alleged.
“There’s no reason for the recaltricance,” Coakley said. “It makes no sense for our federal government to stand in the way of this work to help struggling families stay in their homes, and it is illegal for Fannie and Freddie to do this in Massachusetts.”
In 2012, Massachusetts passed legislation that prevents creditors from blocking or placing conditions on home sales to nonprofits that intend to resell those properties back to their former owners. Since then, state officials have been pushing the Federal Housing Finance Agency, which took over the failing Fannie Mae and Freddie Mac in 2008 during the financial crisis, to change its practices.
“We’ve been disappointed with the pace of change,” she said.
The federal housing agency declined to comment Monday because the matter is now in litigation.
The agency has defended its policy in the past as a way to protect taxpayers, arguing there is no certainty the delinquent homeowners can afford even the lower loan amounts.
Freddie Mac and Fannie Mae guarantee or own more than three-quarters of all residential mortgages in the country.
At issue is the federal housing agency’s policy that the sales of troubled homes be kept at “arms length,” meaning they can’t be sold to the original borrowers. The agency also requires that nonprofits that want to buy foreclosed homes and resell them to the original owner pay the full mortgage amount, plus any late penalties and fees.
Often, the original mortgage amount is for tens of thousands of dollars more than what the house is currently worth, said Elyse Cherry, the chief executive of Boston Community Capital, a nonprofit that has assisted foreclosed homeowners.
It has helped nearly 500 families remain in their homes, Cherry said, by buying the properties at current market value and then selling them back to qualified owners with a more affordable repayment schedule.
The default rates on these new loans are lower than the national average, Cherry said.
But the nonprofit has been forced to turn away dozens of applicants whose mortgages are held by Fannie Mae or Freddie Mac , Cherry said.
“They’re insisting that the homeowner be tossed out of home,” she said.
State housing advocates don’t have estimates of how many homeowners could benefit if the federal agency changed its policies, but considering the breadth of Freddie Mac’s and Fannie Mae’s loan portfolio, it could be significant, Cherry said.
The lawsuit comes as the housing market rebounds, with property values on the rise and foreclosures in decline.
The number of Massachusetts homes in the foreclosure process during April declined to 10,685, nearly 57 percent below the same period a year earlier, according to Foreclosure Monitor, a report published by the Massachusetts Housing Partnership, a nonprofit affordable housing organization.
But some cities, such as Brockton and Springfield, have a high number of homes that remain at risk of being foreclosed.
“In those communities, the foreclosure crisis is alive and well,” Cherry said.
“The challenge is [that] in lower-income communities the run-up of property values was greater, and the prices haven’t recovered.”