When I graduated from Harvard Law School in 1977, there were only a dozen or so of us who went on to public interest or government work. Some did pursue law school teaching after clerkships. But the vast majority of HLS graduates in my year went to corporate law firms where they stayed for the rest of their lives, unless they moved to another law firm, or spent a stint in a high-level government or corporate job. Except for a few professors and programs, HLS gave students no alternative path except the road to corporate law.
Going into public interest law required us to find our own path, and after clerking for a district court judge, and working at another small firm and a non-profit organization, I founded my own law firm. It is small enough so that everyone can pitch in on any case, and effective enough to achieve favorable results for most of our clients.
Many of our cases involve working with my clients to “connect the dots” in order to figure out why an employer has retaliated against an employee who protested illegal activities in the workplace, such as discrimination or a waste of government funds.
One of the cases that we are handling in active litigation has led to unexpected but beneficial reforms in the mortgage finance industry, which is dominated by Fannie Mae and Freddie Mac, which are sponsored by the federal government and provide most of the financing for the mortgage industry in the United States.
In January 2010, Caroline Herron, a high-level contractor in Fannie Mae, came to our office. She told us about how after working for Fannie Mae for eight years in-house as a vice president and as a contractor, Fannie Mae had fired her and blackballed her for disclosing to the Treasury Department serious failings in the Obama Administration’s signature anti-foreclosure program.
From late 2008 through 2009, this country was in the depth of a housing crisis that threatened the collapse of the U.S. economy. Many of those who suffered the most were borrowers whose houses were “underwater” – mortgages where the remaining balance was higher than the value of the house. In order to help these borrowers avoid foreclosure, the administration enacted a program called Making Homes Affordable. The idea behind MHA was to give borrowers a grace period on their loans for three months to see whether they would qualify for a permanent modification of their loans that would allow them to remain in their homes.
The Treasury Department entrusted the running of the program to Fannie Mae. Fannie Mae was and is in a government conservatorship because it had engaged in risky practice of buying worthless mortgages that left it undercapitalized. Fannie Mae had no prior experience in running a program such as MHA, and as government investigators later found, lacked the core competencies to run the program.
Treasury announced the MHA program amid great fanfare and claimed that it would help 7 million borrowers. It soon reduced its claims about the program to say it would help 3 to 4 million borrowers. Today, the U.S. government is forced to admit that MHA has helped no more than 1 million borrowers.
Instead, the program was often helping the executives of Fannie Mae, who drew huge bonuses because of the misleading statistics about the program that they presented in the company’s annual filings. These statistics were so infirm that they could not use those statistics for an accurate report to investors and shareholders in those same public filings. But they did use these statistics about the MHA program to justify big bonuses for themselves.
This is how it worked, and this is why Fannie Mae fired Ms. Herron for her reports to Treasury about the problems with the program.
Fannie Mae administered the program, and urged the holders of the troubled loans to give “trial modifications” based on stated income to homeowners in trouble. Stated income modifications were made simply on a homeowner’s unverified, oral statements about his income or resources.After a three month or longer time period, a trial or stated income modification could be converted to a permanent modification, but at that time the homeowner needed verify the household income, such as tax returns or paycheck stubs.
After the first three months, most homeowners could not verify sufficient income and were unable to obtain permanent modifications. These homeowners were worse off than before, because they had not been making their mortgage payments under the trial program, and were no longer eligible for any other permanent modification program.
Despite early evidence that about 90% of the trial modifications were not converting to permanent modifications, Fannie Mae executives forged full steam ahead with the stated income modifications.
In Fannie Mae’s 2009 10K filings with the Securities and Exchange Commission, it gave two different figures for loan modifications. The first figure was supposed to give an accurate picture of the company to investors and shareholders. That figure stated that Fannie Mae had completed 2 million modifications of troubled mortgages. It did not include the trial modifications that Fannie Mae knew would never convert to permanent modifications and help homeowners.
However, in the part of the 2009 10K that described the basis for executive bonuses, Fannie Mae claimed 6 million loan modifications, justifying huge executive bonuses.
So, when Ms. Herron started telling Treasury from her birds’ eye perch within Fannie Mae that the trial modifications are not converting, Fannie Mae refused to allow her to work with the Treasury Department, and then they then fired her and prevented her from ever working anywhere else in Fannie Mae.
In one executive’s words, he didn’t want her to go to Treasury because he thought she would be “mean” to Fannie Mae.
We sent a demand letter to Fannie Mae on her behalf in March 2010, and then filed suit in June 2010. The press accompanying her suit and allegations led Fannie Mae’s conservator to stop payment of any incentive payments to Fannie Mae under its contract with Treasury to administer the MHA program. And, more importantly, it stopped Fannie Mae from using trial modifications to meet its housing goals.
However, that did not stop Fannie Mae executives’ relentless pursuit of bonuses. In Fannie Mae’s 2010 10K, Fannie Mae now claimed that their bonuses should be substantial because the number of modifications for which they were responsible increased from 2 million to 4 million. Gone entirely is the 6 million modification figure from the 2009 10K. Instead, Fannie Mae relied on the 2 million modification figure and now counted the trial modifications from 2009 in another way. Because most of these trial modifications could not be converted under the MHA program, Fannie Mae created its own program to convert these trial modifications to permanent modifications by setting its own lower eligibility requirements. So now the trial modifications that could not be converted under the government program for Fannie Mae loans could be double-counted to justify large bonuses for executives for 2010.
Today, it is clear that MHA only helped about 1 million homeowners while preventing many others from ever obtaining permanent modifications. The public reports on the MHA program have uniformly said it failed. Fannie Mae’s retaliation against one high level whistle-blower prevented a quicker turnaround of a major government program, hurting potentially millions of borrowers.
Mr. Herron’s suit helped bring about changes in the program. Whether she will get any relief for disclosing these problems to Treasury is yet to be determined. However, her story is a cautionary tale to Congress and Treasury about not setting incentives that encourage GSE executives to maximize their bonuses at the expense of the public.
Those of us who went into public interest law followed our own paths, and ended up in fascinating and rewarding jobs. Contrary to the common wisdom taught at the Law School at that time, I have found my career to be filled with intellectually and politically fulfilling cases and projects. It is deeply satisfying when we are able to figure out the real story, and even more so when we can effect a positive change.
Lynne Bernabei is a founding partner of Bernabei & Wachtel, PLLC. She has been litigating civil rights and whistleblower protection cases for over thirty years. Ms. Bernabei is a 1977 graduate of the Law School.