The Federal Housing Finance Agency is seeking public comment on a proposal to raise the guarantee fees Fannie Mae and Freddie Mac charge lenders in five states where costs related to foreclosure practices are significantly higher than the national average.
These five states are Connecticut, Florida, Illinois, New Jersey and New York. According to the proposal, lenders would have to pay an upfront fee of between 15 and 30 basis points — 0.15 to 0.3 percent — for each single-family mortgage originated in those states and later acquired by Fannie Mae or Freddie Mac.
That increase means that a borrower in an affected state obtaining a 30-year, fixed-rate mortgage of $200,000 could see his or her monthly mortgage payment rise by about $3.50 to $7, the regulator said.
The FHFA chose the five states based on three factors: the expected number of days it takes Fannie or Freddie to foreclose and obtain title to a property; the average per-day carrying costs Fannie and Freddie incur in a state; and the expected national average default rate on a single-family mortgage acquired by Fannie and Freddie. The size of the fee increase will depend on how much a particular state deviates from the national average.
FHFA Acting Director Edward DeMarco said last fall that Fannie and Freddie lose more money when loans they guarantee go into foreclosure in states with laws on the books that lengthen foreclosure timelines — so-called "judicial foreclosure" states like the five chosen.
While the FHFA’s proposed methodology on risk-based pricing does not consider the effect of laws and ordinances affecting foreclosure timelines and costs, the regulator said it may consider the impact of such laws in the future.
The increase is focused on the small number of states that impose the greatest costs on Fannie, Freddie and taxpayers, the regulator said, adding that "inadequate" guarantee fees were at least partially responsible for Fannie and Freddie needing bailouts from taxpayers.
"As conservator of Fannie Mae and Freddie Mac, FHFA has a statutory obligation to preserve and conserve their assets and has a responsibility to ensure that the companies properly measure and manage risk, and that they are compensated for the costs they incur," the regulator said in a statement.
Currently, Fannie and Freddie set guarantee fees nationally and therefore borrowers in states with lower default-related carrying costs are effectively subsidizing borrowers in states with higher costs, the FHFA added.
The public has 60 days to submit comments, either at firstname.lastname@example.org or by writing to FHFA OPAR, 400 Seventh St., SW, Ninth Floor, Washington, DC 20024. After reviewing public input, the FHFA will decide on a final methodology for state-level guarantee fee pricing and expects to order the implementation of price increases sometime in 2013.
As part of a broader plan to bring back the secondary market for mortgages not guaranteed by the government, the FHFA recently ordered Fannie and Freddie to raise guarantee fees they charge to lenders by an average of 10 basis points. The fee increase will go into effect Nov. 1 for loans sold to Fannie and Freddie for cash and Dec. 1 for loans exchanged for mortgage-backed securities.
Fannie and Freddie increased their guarantee fees from an average of 26 basis points in 2010 to 28 basis points in 2011, regulators said in a recently released report.
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