Edward J. DeMarco, the overseer of taxpayer-supported Fannie Mae (FNMA) and Freddie Mac, said the firms need to increase the fees they charge to guarantee mortgages in states where it’s costlier for them to deal with bad debt.
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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.”
Corinne Russell, a spokeswoman for the FHFA, declined to comment.
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. Purchase applications declined 5.3 percent in August, providing “further evidence that mortgage-dependent buyers are barely contributing to the recovery in housing market activity,” Paul Diggle, property economist for Capital Economics in London, wrote in a Sept. 5 note to clients. 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.