Edward DeMarco, acting director of the Federal Housing Finance Agency, said Fannie Mae and Freddie Mac need to increase the fees they charge to guarantee mortgages in states where it's costlier for them to deal with bad debt.

That doesn't bode well for New York, which is among states that extend added protections for borrowers in danger of losing their homes.

It takes an average of 56.3 months, or almost five years, from a missed payment to the liquidation of a mortgaged property in New York, according to JPMorgan Chase & Co. That's about three years longer than in Arizona, where judicial reviews aren't needed for foreclosures and court-supervised workout negotiations aren't mandated. The extra costs could be offset with upfront charges of 0.1 percentage point to 0.2 percentage point of loan amounts, the bank's analysts estimate.

"From a private investor standpoint, it makes complete sense to us" to vary fees by region, said Bryan Whalen, co-head of mortgage bonds at Los Angeles-based TCW Group Inc., which oversees about $130 billion.

Florida, New Jersey and Vermont also could face increased loan rates once lenders start passing on the new fees being considered at Fannie Mae and Freddie Mac, which are meant to compensate for state and local policies that increase losses on defaulted loans. Court-supervised foreclosures add legal expenses, and longer timelines bring more property taxes, insurance and potential maintenance costs.

The change would represent "a major shift" in Fannie Mae and Freddie Mac policy, "which for decades aimed to smooth out regional disparities in mortgage credit pricing and availability," said Adam Levitin, a professor at the Georgetown University Law Center.

DeMarco, the acting director of the Federal Housing Finance Agency, is already facing criticism from lawmakers and homeowner advocates for refusing to allow Fannie Mae and Freddie Mac to reduce principal balances for troubled borrowers. The new policy invites further scrutiny as he tries to reform the companies.

"It is a step back to the pre-Depression market and appears to be taken to bully local government units into standing back and letting the foreclosures roll," said Levitin. "If the FHFA weren't so ideologically determined to prevent principal reduction, local governments wouldn't have to take aggressive anti-foreclosure measures."

While mortgage rates are near record lows as the Federal Reserve pushes down borrowing costs to stimulate the economy, the added fees would come as the housing recovery remains uneven. In the $5 trillion market for government-backed mortgage bonds, securities with loans from affected areas may command higher prices as the odds of borrowers' refinancing falls, according to analysts at JPMorgan and Credit Suisse Group AG.

DeMarco has said Fannie Mae and Freddie Mac should adjust their guarantee fees to better reflect their costs and match how private firms would act. The goal is to reduce their role in a market where they back roughly two-thirds of new loans and improve their finances.

The two have relied on almost $190 billion of capital injections from taxpayers to stay solvent after being seized by the government in 2008.

The FHFA will "soon" release a paper for public input on the idea of varying their guarantee fees by state, DeMarco said in a Sept. 10 speech to bankers in North Carolina.

It wants "a pricing approach to better capture the costs associated with state and local policies," DeMarco said. "The approach will seek input on imposing an upfront fee on newly acquired single-family mortgages originated in states where the enterprises are likely to incur default-related costs that are significantly higher than the national average."

Liquidation timelines in so-called judicial states, where foreclosures require the use of courts, averaged 37.5 months in the second quarter, 6.5 months more than elsewhere, according to a JPMorgan report last month, which cited data from LoanPerformance. Fannie Mae and Freddie Mac's costs also increase as they borrow money to carry bad debt removed from their securities, the analysts led by Matthew Jozoff wrote.

The firms' main business is guaranteeing mortgage bonds filled with pools of loans, allowing banks to sell the debt and make more loans. In return for their insurance, the companies charge a combination of upfront fees and annual premiums, which are typically siphoned off of borrowers' interest payments.

Those fees averaged 0.28 percentage point of new loan amounts annually in 2011, an increase of 0.02 percentage point from 2010, with lower-risk loans subsidizing those more likely to default, according to an FHFA report released Aug. 31. Those figures translate the smaller amount of upfront charges to annual amounts over loans' expected lives.

An across-the-board increase of 0.1 percentage point that flows directly to the government's coffers took effect in April. Last month, the FHFA announced additional increases designed to average 0.1 percentage point, while varying depending on loan terms and other factors, would start in November. An increase of 0.1 percentage point would cost a borrower with a $200,000 mortgage about $4,000 over a 30-year loan term.

Fannie Mae and Freddie Mac have previously been forced to reverse course on policies based on geography.

In December 2007, with home-prices collapsing, the firms began requiring higher down payments from borrowers in troubled markets. Six months later, the companies announced they would revoke that policy after criticism from consumer and housing advocates including the National Association of Realtors.

The latest "proposal will likely draw the ire of many lawmakers on Capitol Hill as it will cause distinctions between the costs of credit in different states," Isaac Boltansky, an analyst at Compass Point Research & Trading LLC in Washington, said yesterday in a note to clients.

DeMarco has already drawn criticism after saying in July he wouldn't allow Fannie Mae and Freddie Mac to reduce mortgage balances for troubled borrowers. Treasury Secretary Timothy F. Geithner urged DeMarco to reconsider it in a letter, while Rep. Hansen Clarke, a Michigan Democrat, called for the FHFA chief to be fired.

His agency also clashed with Chicago officials, suing the city in December in a bid to block it from forcing Fannie Mae and Freddie Mac to follow an ordinance covering the maintenance of vacant properties, including those not yet seized.

Despite opposition, state-by-state pricing is likely to be implemented and may prompt a shift in which rules for dealing with bad loans begin to converge across the country, said Joshua Rosner, an analyst at research firm Graham Fisher & Co.

"It should help to support a streamlining of the foreclosure practices in areas with very long timelines," he said.

The time it takes to liquidate bad loans isn't just dependent on whether foreclosures require court action. Rules in judicial states also vary. New Jersey liquidations take 50.1 months, compared with 26.4 months for Nebraska. In Vermont it's 49.9 months and 46 months for Florida. The figures among non- judicial areas range from 71.1 months in the District of Columbia and 56.1 in Hawaii to 23.4 in Arizona and 23.9 in West Virginia.

Investors in mortgage bonds without government-backed guarantees already look at the location of the underlying loans in determining how much to pay, TCW's Whalen said.

"Home-price performance aside, just the difference in timelines between areas can make a significant difference in recoveries" on defaulted loans, he said.

Assuming "no delays and everything goes by the book," about a year is required in New York between an initial foreclosure notice and a lender seizing the property, according to Daren Blomquist, vice president at the Irvine, California- based RealtyTrac Inc. That's the most in the U.S., partly reflecting the time required between the various legal steps before a bank can move to next one, he said.

Since February, 2010, New York has also required that all owner-occupied residential foreclosures involve settlement conferences between borrowers and lenders, according to a court system website.

While New York foreclosures have always taken longer, those in Florida only ballooned once its courts became bogged down by a flood of defaults, said Thomas Lawler, a former Fannie Mae economist who is now a Virginia-based housing consultant.

"Back in 2005 and 2006, Florida didn't have a particularly long timeline," he said.

Non-judicial states also have varied rules. Minnesota is among places where borrowers are granted time after a foreclosure to repay their loan and take a property back, stalling a lender's ability to move forward, Blomquist said.

Barry Zigas, the director of housing policy at the Consumer Mortgage Federation of America, said it's important for the FHFA to seek public comment.

"States are pretty big geographies, and they encompass pretty variegated markets," he said. "I would be concerned that otherwise perfectly creditworthy borrowers who don't represent any incremental risk would get swept up in some version of pricing that disadvantages them simply by virtue of where they live."

The proposal adds to a shift since the credit crisis began in which Fannie Mae and Freddie Mac no longer treat all borrowers equally with their guarantee fees, said John Taylor, president of the National Community Reinvestment Coalition. That's harming minorities and individuals who aren't wealthy who have been hardest hit by the housing crash that started in 2006, he said in a telephone interview.

"I'm actually quite distressed about it," said Taylor, whose Washington-based organization represents community and housing groups. "Don't disproportionally lay it on the backs of people who are struggling more than others and the communities that have been the most devastated by the mortgage lending malfeasance" during the housing bubble, he said.

Fannie Mae and Freddie Mac's fees should reflect their risks, and the need to vary them by state reflects a lack of national foreclosure rules that should be fixed, Lawler said.

"Having the same underwriting and pricing regardless of the costs is pretty stupid," he said.

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