In potentially far-reaching class action lawsuits, homeowners in two states are suing mortgage giants Fannie Mae and Freddie Mac for allegedly overcharging consumers by millions of dollars a year. The suits, filed in U.S. District Court for the District of Columbia by homeowners in Connecticut and Wisconsin, accuse both corporations of violating federal and state anti-trust law since 2001 by conspiring to set -- and maintain -- certain fees higher than market conditions required.
The suits focus on so-called "G-fees," or guaranty fees, that both companies charge lenders in connection with mortgage bond securitizations. The guaranty fees, which the suits say add about two-tenths of a percent onto the cost of a loan, "are a component of the monthly mortgage rate charged by lenders and paid by tens of millions of consumers each month."
According to the suits, a G-fee on a $250,000 home loan adds about $500 per year to a consumer's costs in the early years of the loan, and a total $11,350 over the 30 year life of the mortgage. Fannie and Freddie both charge G-fees as compensation for their guarantees to mortgage bond investors of "timely" remittances of principal and interest payments, even when homeowners miss monthly payments, are late, or go into default.
The suits say that G-fees "should rise or fall with Fannie Mae's and Freddie Mac's actual losses due to mortgage defaults." But because of alleged illegal "lock step" agreements, neither corporation's fees have done so in recent years. Whereas in 1995 G-fees collected by Fannie and Freddie represented 4.4 times their actual dollar losses from borrower defaults, in 2003 they totaled 33 times losses.
The suits allege that beginning in 2001, Freddie Mac established a "G-fee floor" below which its fees could not fall, and that Fannie Mae soon adopted a similar policy "in lock step," in violation of federal and state anti-trust laws.
Freddie Mac denied the allegations in the suits. Fannie Mae did not comment on the filings.
Both suits cite a report to Congress by Fannie and Freddie's regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), that criticized the corporations for charging artificially-high G-fees that "yield excessive profits at the expense of millions of homeowners."
The suits also allege consumer protection statute violations in all 50 states by Freddie and Fannie because of their policies of meeting "secretly" with lenders to set G-fees and then requiring those lenders to sign non-disclosure agreements about their F-fees. That amounts to "a deceptive, unfair or unconscionable act" that violates state consumer protection laws nationwide, according to the suits.
The federal class actions cover all home buyers whose loan payments contain a G-fee charged by Fannie or Freddie during the period Jan. 1, 2001 to the present. The suits estimate that millions of homeowners could be victims of the alleged overcharges by Fannie and Freddie, and demand treble damages for their injuries.