Could homebuyers and loan applicants in states with lengthy foreclosure timelines — from notice of default to repossession of the house by the bank — soon be subjected to targeted price hikes on new mortgages?
Could borrowers in places like New York, Florida, New Jersey and Maryland be heading for payback time? It sure sounds like it.
In fact, if you listen to the latest ideas from Edward DeMarco, who oversees Fannie Mae and Freddie Mac in his role as acting director of the Federal Housing Finance Agency, you can pretty much bank on it.
Though his comments on foreclosure timelines drew little notice, mortgage industry experts say they wouldn’t be surprised by potentially controversial "geographic" price increases, as well as jumps in fees or insurance coverage for certain loan products such as low-down payment "community" mortgages aimed at moderate-income and minority applicants.
It’s all part of a much larger project now on the drawing boards for Fannie and Freddie: Major ramping up of the guarantee fee (also known as a "G-fee") the two corporations charge lenders who do mortgage-backed securities business with them. Any across-the-board increase would inevitably be passed along to homebuyers and refinancers.
Here’s a quick overview of what’s under way and how it’s likely to affect real estate: At a banking industry conference in North Carolina last week, DeMarco laid out some cold-light-of-morning principles for operating Fannie and Freddie — which together fund well over half of all new loans — in the months ahead.
As federal conservator of the two corporations, DeMarco’s agency essentially tells them what to do to minimize further losses for taxpayers, who have already pumped $150 billion-plus into propping them up following their takeover in 2008.
Since the companies are now wards of the government, DeMarco believes that they need to abandon the one-size-fits-all pricing approaches they followed during their quasi-private, quasi-public previous existences.
To begin with, he believes, they need to start charging for geographic risk variations. The statistical fact is that the companies lose a whole lot more money when a loan goes belly-up in a state where the foreclosure process drags on for years compared with what they lose in a state where foreclosures get wrapped up lickety-split.
DeMarco says they need to wake up and start charging for it.
For example, according to data firm RealtyTrac, the average timeline for a foreclosure — start to finish — in New York state was an astounding 966 days as of June 30. In New Jersey it takes 944 days, in Florida 676 days, in Tennessee 545, Maryland 536, Pennsylvania 508, Wisconsin 447 and Ohio 442. In a number of other states, the process takes a year or more.
On the other hand, in Texas a foreclosure takes an average of just 92 days from first notice to repossession. In Virginia 106 days, Louisiana 111 days, according to RealtyTrac.
Chris Gamaitoni, senior vice president of consulting firm Compass Point Research & Trading LLC, says the added "loss severity" confronted by Fannie and Freddie in states where foreclosure timelines are lengthy "is very significant." The longer a lender or investor is prevented from recovering and reselling the property securing a defaulted mortgage, the higher the losses on that mortgage mount — literally day by day.
"This gets very expensive," he said in an interview. "What’s the cost of keeping up the property for a month" — to say nothing about the foregone principal and interest payments plus the need to keep shoveling out money for local or state property taxes?
Sometimes the costs mount into the thousands of dollars a month, particularly when a vacant property falls into disrepair or is vandalized.
Now multiply the monthly bills by two or three years and the loss severity to the investor — in this case Fannie or Freddie — becomes massive in states like New York, New Jersey or Florida compared with loans in Texas or Virginia.
Yet those elevated expenses currently are nowhere reflected in the fees borrowers pay. Under Fannie and Freddie’s longstanding one-size-fits-all pricing policy, borrowers in fast-foreclosure states have been subsidizing the rates and fees paid by borrowers in slow states.
DeMarco’s comments last week suggest that party is probably over. He said Fannie and Freddie for too long have been "absorbing, but not pricing for, added credit risk associated with specific local market conditions and policies," including "state and local laws that can greatly impact (Fannie and Freddie’s) costs."
When I later asked him how big the increase in fees could be in states where foreclosures are most costly, he said in an email response that "we have not decided anything about size, timing or composition of such charges, only that we expect to see increases in the future and that we will consider these" factors.
Mortgage market experts said the differential fee increases are likely to be part of a broader reconsideration of pricing. Estimates of the possible "G-fee" increases — which DeMarco said will be phased in gradually — range from 60 to 75 basis points to well over 100 basis points: i.e., more than 0.5 percent to more than 1 percent.
One expert who formerly was employed at Fannie Mae and could only speak on background said the geographic component of the G-fee change, alone, could exceed 0.5 percentage point.
Presumably the fee penalties for certain slow-foreclosure states could be administered as add-on charges at delivery, a la the "loan level price adjustments" Fannie and Freddie now impose on condos, FICO scores below certain thresholds, etc., or incorporated into G-fees in some way.
However it’s done, the bottom line is likely to be the same: If you cost us more, we’re going to charge you more.