The Club Nobody Wants To Join

With no publicly available copy of the list, the list in itself poses a slippery slope for originators. And, in other words, it’s a big, mysterious club where Freddie Mac gets to play Santa Claus — sans the elves — and decide who’s naughty and who’s nice, without any pesky regulations or due process to cramp their style.

Limited Success

Shawn Yesner, an attorney for Yesner Law in Tampa, Fla., specializes in Chapter 11 bankruptcy, asset protection, and financial cases. But one of his specialties is helping clients get off — or attempt to get off — the exclusionary list. But even as an experienced attorney, Yesner says it’s not necessary for those on the list to jump the gun and hire a lawyer immediately after receiving the notice, but he says lawyers may offer up an edge to a client’s argument. “I think the benefit of an attorney is that we’re trained and practice thinking about things in a certain way and arguing on behalf of our client,” he explained. “While some non-attorneys have that skill, it is the same concept as using an auto-technician to change your oil, a CPA to file your taxes, a Realtor to sell your house, etc.”

So what’s the cost? Yesner disclosed that he charges a flat rate for helping with letters to Freddie Mac instead of hourly or contingency fees. Yesner’s careful not to mention a ballpark rate because he admits that getting a client off the list is only successful half of the time.

While this statistic sounds grim, Yesner explains that Freddie Mac is elusive about their reasoning behind why someone in the industry is on a list, which in turn hurts his statistics. The GSE gives an offender 21 days to prove that they didn’t do anything wrong. And most times, the “proof” is rejected because Freddie Mac doesn’t believe the person can change in 21 days’ time. They may be kind enough to drop a breadcrumb by revealing the initial “why” Yesner says, but don’t hold your breath for a heartfelt response. Per Yesner’s experience, Freddie will send either a cookie-cutter congrats or a polite brush-off letter. It leaves folks in the industry feeling like they’re participating in some shady underworld operation because the list’s legality is about as clear as mud.

To add to the list’s grim reputation, Yesner cited an emotional component to it. “It makes people feel like they’re criminals,” said Yesner, even though the list has no accordance with the law.

And being on the list isn’t the only enforcement action that Freddie Mac could take. The spokesperson explained “Freddie Mac may refer matters to an individual’s employer and to trade or professional organizations whose rules govern that conduct. In some circumstances, Freddie Mac has an obligation to report suspected unlawful activity to the relevant government authority.”

Watch it on The Interest: The Club Nobody Wants To Join

Trial and Error

So how do LOs and others in the industry end up on Freddie Mac’s death row? Greg Thompson, founder and CEO of California-based Secondary Marketing Solutions, has experience helping clients attempt to get off the list. Unlike Yesner, Thompson doesn’t practice law and says he only became involved in helping people when a client expressed to him that he was on the list after finding out four of his loans with Freddie Mac defaulted.

Thompson says that the loans in question involved brokered loans not funded on the client’s warehouse line. “He didn’t have control of the due diligence after he brokered the loans. He didn’t even know how to defend himself, it was quite an unusual situation,” Thompson said. “Freddie Mac sent him a notification that the loans were fraud … It was around 2007 or 2008 and he ended up being in a position where he had to shut his company down and then when all was said and done he was on the list.”

Thompson said that he called his friend Fred Taylor, the former president of Ginnie Mae, for advice. They both approached Freddie Mac, who was adamant that Thompson’s client had committed fraud. “There was no court in this situation,” Thompson said. “They had made a decision and put him on the list, and he couldn’t defend himself. It took about two years for him to show proof that he wasn’t involved in fraud.”

Last-Ditch Efforts

Freddie Mac offers one final catch to those on the list: the ability to appeal their case after a year, provided they were unsuccessful in persuading the GSE during the initial 21-day assessment period. The same spokesperson said “Freddie Mac will generally provide an individual or company written notice of the proposed placement of their names on the Exclusionary List, along with an opportunity to submit a written response … We consider removal requests on a case-by-case basis.”

To appeal or not to appeal is the age-old stressor that comes as a side effect of being on the list. After all, Freddie Mac has a rule that the offender can appeal a max of one time per year. Yesner says that in his experience, clients who are on the list express concerns first about how to do business while on the list. “I’ve had clients who have been on the list for over a decade,” Yesner said. “Many of them have to survive by doing all-cash, commercial, or conventional loans.”

However, not all stay afloat. Travis Salisbury, an attorney with Mahdavi, Bacon, Halfhill & Young, PLLC, says that he’s seen the list destroy the lives of his clients. Salisbury and his firm, like Yesner, work with those on the blacklist frequently. “I think a lot of people in the industry are unaware of the consequences of being put on the list,” he said. “It will essentially render your career in purgatory until you get removed from that list.”

Salisbury estimates that the success rate of getting off the list is about a 40-50% chance if they wait the one-year period to appeal. “[However,] better success happens when people try to appeal immediately after getting the notice from Freddie [Mac] that they could be added to the list. Probably 60-70% chance,” Salisbury elaborated.

A Thorny Path

If and when a client decides to appeal, the firm representing them will send a package of evidence, including a letter to Freddie Mac, defending the client and explaining in detail why they should be removed from the list. A lot goes into a successful package, Salisbury and Yesner both say. “The biggest issue is that Freddie gives you nothing [and they have] no online resources,” Salisbury said. “Freddie has their justifications so you need to present a strong argument to keep someone off.” Yesner agreed, saying “I haven’t been able to talk to someone from Freddie Mac or create close ties with anyone there.”

So a lot of the appeal process is a guessing game. Yesner admits that a lot of guessing goes into what he puts into a package. “I try to identify trends amongst all my clients: what did I say in one letter that I didn’t in another?” he said. “I don’t spend a lot of time on a lengthy explanation because Freddie Mac doesn’t care; they want to be shown the evidence, not told.”

Some trends Yesner identified are Freddie Mac being weary about a company’s processes and being meticulous about W2 forms, credit reports, and employment records. “[Freddie] doesn’t like it when a person has a ‘lack of control’ over their Freddie Mac products or processes,” Yesner said. “So in that case, I spend my time in the letter detailing a company’s processes and procedures to ensure that the loans are actually secure. I’ve even sent credit reports to prove that information wasn’t falsified. Think of it this way: if someone is asking for parole, they don’t argue with the parole board. Instead, they argue that they understand what they did was wrong and that they know how to avoid the situation.”

Salisbury and his firm, on the other hand, vet clients who are on the list. “In our experience, we kind of have an internal theory that there are two ways to get off the list: one, exculpatory evidence and definitive proof that someone wasn’t involved in a bad loan process. For that, they go into detail about the company structure and how someone’s name might have popped up even if they weren’t directly involved,” Salisbury said. “And two, mea culpa: You were caught doing something wrong that you didn’t know you were doing wrong. This approach involves apologizing and showing what they’ve done since then to rectify the problems to ensure this doesn’t happen again.”

Theories Behind The List

At the end of the day, Salisbury says that Freddie Mac is out to protect itself. “Since the housing collapse, this has been something they put great emphasis on,” he said. “They’re trying to make sure false loans don’t slip through the cracks. If there’s any whiff of any issue, they are quick to jump on it, especially if the incident involves a small brokerage or small LO.”

Salisbury theorizes, though, that Freddie Mac tends to be more forgiving to large producers. “Freddie tends to be more lenient on people that bring them more business,” he observed. “At the end of the day, they’re a business cloaked in a government shield.”

But for Yesner, the experience has been different. “I had a top producer for [Freddie Mac] on the list and in the letter, I was sure to write that it didn’t make sense that the more time this guy was on the list, the more money they were losing by not having this top producer writing loans,” Yesner said. “This client eventually got off the list but I’ll never know which part of the letter I wrote was the selling point.”

Intimidation tactics could also play a role, Salisbury reasoned. “A lot of the time, we deal with people who are not officially on the list but have received the initial notice, and in that case, we will send a notice to Freddie that we have been retained and we are looking into it,” he said. “This is an attempt to have Freddie back off while the firm investigates the claim. And, if the client is cooperative, it’s a quicker turnaround for us to send a package back to Freddie — about 4-6 weeks.”

Those who manage to get off the list are tight-lipped about their experience, causing more ambiguity around Freddie Mac’s Exclusionary Club. Thompson, Yesner, and Salisbury all reached out to past clients to speak on behalf of their experiences on the list. All of them declined. “This industry is so tight and everyone knows each other … you don’t know if there’s going to be backlash as a result of being quoted,” Thompson explained. “This experience is like [them] versus the world.”