In an attempt to compensate for higher foreclosure related losses, the Federal Housing Finance Agency is proposing that Fannie Mae and Freddie Mac charge higher fees on new loans in five states.
According to a notice posted by the FHFA on Thursday morning, Fannie and Freddie would charge lenders 15 to 30 basis points more to guarantee loans on homes in Connecticut, Florida, Illinois, New Jersey, and New York. The goal is "to recover a portion of the exceptionally high costs that the [government-sponsored enterprises] incur in cases of mortgage default in those states," the notice says.
The FHFA has broadly been raising rates in an effort to recoup losses on GSE loans and, at least theoretically, to encourage private capital back into the mortgage bond market. But the Thursday proposal is geared to what the FHFA describes as leveling the playing field. The proposal amounts to a recognition that lenders incur additional costs when foreclosing on homes in jurisdictions with more extensive legal reviews, high property taxes, or state laws that bog down the foreclosure process. The one-time levies, which lenders may pass through to borrowers, would be charged only in states where the average cost of foreclosures is more than 1.5 standard deviations above the national average.
Foreclosures in Virginia, for example, average 270 days and the costs associated with handling the default are relatively low, meaning the state's borrowers would see no additional fees. New York, on the other hand, would see a 30-basis point fee hike because it averages 820 days per foreclosure and the daily carrying costs are 112% of the national benchmark. Currently Fannie Mae and Freddie Mac charge the same price for loans originated in the two states.
"Borrowers in states with lower default-related carrying costs are effectively subsidizing borrowers in states with higher costs," the notice reads. It added, however, that if high-cost states change their laws in ways that reduce foreclosure time lines, "the state-level, risk-based fees imposed under the planned approach would be lowered or eliminated."
The plan has some potential for controversy, as borrower advocates have argued that bank missteps, not state rules, are to blame for messy, protracted foreclosures. But because the extra cost is a one-time fee, it's overall effect on the price of a loan will be modest. A New York borrower with a $200,000 loan would pay an extra $7 on top of his monthly mortgage payment.
The proposal will be open for public comment for the next 60 days.