Fannie Mae (FNMA) and Freddie Mac (FMCC) would charge lenders more to guarantee mortgages in five states where foreclosure delays are pushing up the cost of bad debt, according to a plan by the companies’ U.S. regulator.
The Federal Housing Finance Agency’s proposal may pinch borrowers in New York, New Jersey, Connecticut, Florida and Illinois as those states have higher average total costs for defaulted loans, according to a notice today requesting public input. The agency is proposing a one-time upfront fee of 0.15 percent to 0.3 percent on loans originated in those states that would take effect in 2013.
The FHFA said it’s targeting states where mandatory court involvement or regulatory policies prolong foreclosures and lead to higher carrying costs, the expenses associated with holding onto vacant properties.
The approach allows that each state establishes foreclosure rules “that it judges to be appropriate for its residents,” FHFA Acting Director Edward J. DeMarco wrote in the notice. “It also recognizes that unusual costs associated with practices outside of the norm in the rest of the country should be borne by the citizens of that particular state rather than absorbed by borrowers in other states or by taxpayers.”
The main causes of cost differences by state are the length of time it takes to get title to a property, property taxes and legal and operational expenses during that time, DeMarco said.
Senator Robert Menendez, a Democrat from New Jersey, called the proposal “outrageous” in a statement released today.
“After banks preyed on homeowners with subprime loans and improper foreclosures, FHFA now wants to penalize homeowners in states that have strong consumer protections to stop banks from wrongfully foreclosing,” Menendez said.
The proposal was described as a “measured response” by Tim Rood, managing partner at Collingwood LLC, a Washington- based consulting firm.
“There is a very legitimate economic argument to be made for raising these fees,” he said in an e-mail.
The FHFA probably will eventually expand the risk-based pricing to other states with higher-than-average foreclosure costs, Jaret Seiberg, senior policy analyst at Guggenheim Securities, said in an e-mail.
“There is simply no reason why borrowers in states with efficient foreclosure systems should subsidize borrowers in states that make it difficult for lenders to obtain the collateral on defaulted loans,” Seiberg said.
It takes an average of 820 days to bring a foreclosed property to market in New York, where daily carrying costs are 112 percent of the national average, according to the FHFA. Virginia takes an average of 270 days to bring a foreclosure to market and carrying costs are 87 percent of the national average, making the state the least costly and most timely.
States that change foreclosure policies to cut costs so they are in line with the national average could have the extra fees reduced or eliminated, according to DeMarco.
Banks could pass along the cost of the fee increase to borrowers through higher interest rates, according to the FHFA. A borrower with a 30-year, fixed-rate mortgage of $200,000 could face an additional $3.50 to $7 in monthly payments, the agency said.
The FHFA asked for public comments to be filed within 60 days.
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