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Untruth in Lending: Why Ex-Fannie Mae Exec Caroline Herron Got Fired for Doing Her Job

Former Fannie Mae (FMC) executive Caroline Herron is blowing the whistle over what she claims is the government housing finance agency's calculated failure to help homeowners avoid foreclosure.

But her lawsuit, which appears to be the first of its kind against Fannie by a former employee, goes beyond simply detailing the company's botched administration of the federal Home Affordable Modification Program. If what Herron says is true, the complaint is a searing expose of organizational dysfunction.

For corporate managers, her allegations provide a case study on how not to run a company. It paints a picture of a company where leaders lack accountability, bureaucracy and politics reign, and communication is wielded as an instrument of control. And for employees, unfortunately, it's also a reminder of just how hazardous to your career it can be to fight city hall.

Truth Hurts
From 2000 to 2007, Herron was a rising star at Fannie, according to a story today by The Center for Public Integrity, a nonprofit media firm. She got superior performance reviews, took on key projects and rose through the ranks to become a vice president.

Fannie evidently thought so highly of Herron that, after she accepted a voluntary severance package as part of company downsizing, the company brought her back two years later as a well-paid consultant. In that role, she was tasked with helping Fannie coordinate with the U.S. Treasury Department to run HAMP, which President Obama launched in early 2009 to help borrowers work with lenders and loan servicers to modify their mortgages. Her bosses, who are named as defendants in the suit, even recommended her for a job at Treasury, which agreed in principle to bring her aboard.

Then Herron made what was, at least for her career advancement, a mistake -- she told the truth. She found that Fannie's handling of HAMP was a mess. Worse, that was by design. Under its arrangement with the government, Fannie was compensated based on the number of homeowners it put in so-called trial modifications, not on how many people actually kept their homes. That's a problem, since HAMP is supposed to help borrowers avoid foreclosure, not simply delay it for a few months.

According to the suit:

It appeared that Fannie Mae officers were focused on maximizing incentive payments available to Fannie Mae under various federal programs -- even if this meant wasting taxpayer money and delaying the implementation of high-priority Treasury programs....

At the same time that Fannie Mae was attempting to process as many trial modifications as possible before the end of 2009, company executives were delaying or quashing other efforts to streamline a process in which borrowers could provide documentation up front before a trial loan modification is processed.

Herron contends that she raised such concerns with her immediate managers, and was roundly ignored. Indeed, her efforts seem to have poisoned relations with her supervisors. In retaliation, they sabotaged her pending position at Treasury and, in January, fired her, according to the suit. Fannie not only never explained why she was being dismissed, but also barred her managers and other Fannie employees from divulging details regarding her firing, she claims.

Skewed Financial Incentives
Herron also alleges that Fannie blocked the launch of a planned Web site aimed at streamlining the process of applying for mortgage modification. The so-called loan portal, developed by a Newport, Ky., company called Default Mitigation Management and already in use by private mortgage counselors, lets borrowers upload required documents, making it easier to coordinate with loan servicers. That would be a boon because such firms routinely lose these records, while homeowners complain that it's difficult to reach servicers.

Fannie execs initially expressed interest in the site, according to the suit. But the plan festered:

Months went by, though, before Fannie issued a formal request for proposals from software developers. Then, around the start of 2010, Fannie and the Treasury Department abruptly canceled the bidding process. In a letter to U.S. Rep. Geoff Davis of Kentucky, a top Treasury official explained that as the bidding process neared its end, Fannie identified a need for "broader capabilities" in the portal and "determined not to move forward with a borrower portal at that time."
What else might account for Fannie's dithering? Money. If borrowers provided loan documents upfront, HAMP would process fewer trial modifications. That would decrease the incentive payments Fannie got under its contract with Treasury, Herron charges. That would be of particular concern for a company as financially troubled as Fannie, which remains in federal receivership.

Ira Hecht, an attorney in private practice in New York and a former partner with McGuireWoods who oversaw the firm's Internet and technology practice, said in an interview that the loan site could have helped homeowners deal with loan servicers. "The fact that the portal idea never went anywhere is surprising because it would've created efficiencies that seem to be problematic" with HAMP, he said.

Anemic HAMP
Problematic is putting it mildly. Simply put, HAMP is a colossal bust. The $75 billion program was supposed to help up to 4 million financially distressed people keep their homes. As of June, or some 16 months into the program, fewer than 400,000 homeowners have received permanent loan modifications. During that time, there have been more than 300,000 foreclosures for 15 straight months (see map at bottom).

In a withering report to Congress, TARP Special Inspector General Neil Barofsky last month characterized the anti-foreclosure program as "anemic":

HAMP has not put an appreciable dent in foreclosure filings. Indeed, the number of trial and permanent modifications that have been canceled substantially exceeds the number of homeowners helped through permanent modifications.
It's worth noting that Fannie isn't alone in failing to halt foreclosures. Virtually all loan servicers, including major mortgage lenders like Bank of America (BAC) and JPMorgan Chase (JPM), have a poor record of permanently modifying people's mortgages. That reflects HAMP's fundamental flaws: weak incentives for loan servicers to modify mortgages, and a lack of consequences for servicers that refuse to work with homeowners.

"There's huge institutional inertia in place that has prevented putting loan modifications through at a reasonable pace," Diane Thompson, an attorney with the National Consumer Law Center, told me. "Treasury hasn't figured out how to align the economic incentives so either Fannie Mae or other servicers get modifications moving."

I'd like to hear Fannie's side of the story, but for now it's not talking. The company declined to answer the Center for Public Integrity's questions (and didn't return my call). The housing agency disputes Herron's claims, however, saying that an internal investigation found "no merit" to her allegations.

Until the company responds, here's my snap take on what happened. In seeking to do her job at Fannie, a highly competent and motivated employee put her nose where it wasn't wanted. She found things that made the company and her bosses look bad. She proposed changes that threatened to overturn the mortgage-servicing gravy train at Fannie. So it punished her.

Map courtesy of RealtyTrac; image from Wikimedia Commons, CC 2.0

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