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Federal Court Dismisses Lawsuit on Massachusetts Foreclosure Prevention Law

Massachusetts Attorney General Sues Federal Agencies

In Commonwealth of Massachusetts v Federal Housing Finance Agency et al., a federal judge dismissed a lawsuit brought by Massachusetts Attorney General Martha Coakley in which she accused mortgage finance giants Fannie Mae and Freddie Mac of violating a state law meant to prevent Massachusetts residents from losing their homes to foreclosure.american-flag-flies-in-the-autumn-sun-660477-m[1]

The Attorney General, in a complaint filed in June in Massachusetts state court in Suffolk County, alleged that Fannie Mae and Freddie Mac, and the Federal HousingFinance Agency (FHFA), as the agencies’ conservator, refused to comply with Massachusetts law, specifically An Act to Prevent Unnecessary and Unreasonable Foreclosures. The Legislature enacted the law to keep Massachusetts residents in their homes rather than allowing them to lose them to foreclosure. It prohibits creditors’ practice of preventing non-profits from buying foreclosed homes solely on the basis that the non-profit will then resell the property to its former owner at a reduced principal balance.

For example, as described in the complaint, one buyback program is Boston Community Capital’s (BCC) “Stabilizing Urban Neighborhoods” Initiative (SUN). SUN buys homes that have been foreclosed and are now owned by the banks holding the defaulted mortgages. The non-profit buys homes at their current market value and then sells the homes to the original homeowners, the only condition being that they can qualify for financing, which the non-profit makes sure is both available and affordable.

How Federal Agencies’ Practices Are Alleged to Violate Massachusetts Law

The U.S. District Court, when it issued a preliminary injunction in Suero v. Freddie Mac, which prevented the foreclosure sale of the Sueros’ home in Dorchester, cited both SUN and the 2012 law. The court also referred to a February 2013 letter to FHFA from the AG’s Office, explaining that the Massachusetts law prohibits creditors from not considering legitimate offers from reputable buyback programs solely on the basis that the non-profit will then resell the property to its former owner at a reduced principal balance. Fannie Mae and Freddie Mac claim that they must block buybacks under federal regulations forbidding principal reduction.

In the lawsuit filed against Freddie Mac, Fannie Mae, and FHFA, AG Coakley alleged that two of FHFA’s policies violate state law:

  1. Fannie and Freddie’s “arm’s length transaction” policy does not allow homes to be sold to non-profits that then sell them back to their original owners.
  2. The “make whole” policy does not allow Fannie and Freddie to reduce the principal of the mortgage on the home, for either the homeowner or the non-profit, or anyone else seeking to buy and resell the home to the original homeowner.

Federal Court Declines to Take Action Against Agencies

Since the federal government has the right to remove cases against it to federal court, the lawsuit filed by the Attorney General was removed from Suffolk Superior Court to U.S. District Court in Massachusetts. U.S. District Judge Richard Stearns dismissed the suit, concluding that the court had no jurisdiction to hear and decide the dispute between the AG and the federal agencies because the 2008 U.S. Housing and Economic Recovery Act restricts the power of the courts, even the federal courts, to “second-guess” FHFA’s business judgment. The Act also prohibits courts from taking any action to restrain the functions of the FHFA as conservator, Stearns said. Accordingly, he dismissed the AG’s lawsuit.

As experienced Massachusetts real estate attorneys, Pulgini & Norton can help you with all of your real estate legal needs. If you have a question regarding your property rights, give us a call today at 781-843-2200 or contact our office online, and we can help legally clear the way for you.

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