BOSTON (AP) — Attorney General Martha Coakley has sued the Federal Housing Finance Agency and mortgage giants Fannie Mae and Freddie Mac for refusing to comply with a state law designed to stem the tide of foreclosures in Massachusetts.
The lawsuit was filed Monday in Suffolk Superior Court.
Coakley said Fannie Mae and Freddie Mac violated a 2012 Massachusetts law that allows the sale of homes in foreclosure to nonprofit organizations who intend to restructure the loan and sell the property back to the homeowner.
Coakley said the law has worked in Massachusetts.
"It just makes sense to take action that will continue to keep people in their homes," Coakley said. "It makes commercial sense. It makes financial sense and it's frankly the law and not to do it is really unfair."
Fannie Mae and Freddie Mac are under the control of the federal housing agency. A spokeswoman for the FHFA declined to comment on the lawsuit.
The 2012 state law explicitly forbids banks and lenders from refusing to consider offers from legitimate buyback programs merely because the property will be resold to the former homeowner.
Critics of the Massachusetts law have argued that allowing homes to be sold back to homeowners who were unable to maintain their original mortgage would create a "moral hazard" by essentially allowing the homeowner to benefit from a bad contract.
But Coakley said the argument is outdated given the state is still trying to dig out of the foreclosure crisis.
"Why not do the commercially reasonable thing which is allow a not-for-profit to buy it, fix it up and rent it back to family to own?" she said.
Coakley pointed to a one buyback program, Boston Community Capital's Stabilizing Urban Neighborhoods initiative, that she said is harmed by the refusal of the federal housing agencies to abide by the state law. The lawsuit argues that such programs have helped slow the spread of urban blight.
The organization buys foreclosed, bank-owned homes at their present market value and sells the properties back to the original homeowners if they qualify for affordable financing. Coakley said Fannie Mae and Freddie Mac have continued to block buybacks even though they lose money in the process.
The CEO of Boston Community Capital, Elyse Cherry, has said the organization has helped restructure about 500 mortgages. She said the group first makes sure the homeowner is in stable fiscal shape before buying the home and structuring a fixed 30-year rate mortgage and selling it back.
In the complaint, Coakley alleges that two of FHFA's policies violate state law.
One of the policies intended to keep Fannie and Freddie in an "arm's-length transaction" prohibits property sales to nonprofits who resell to the original homeowner.
A second "make whole" policy prevents Fannie and Freddie from accepting anything less than the outstanding loan amount from the former homeowner or anyone seeking to resell or rent to the former homeowner.
Coakley is one of five Democratic candidates running for governor this year.