| If the regulator of Fannie Mae and Freddie Mac has his way, borrowers in states and localities that obstruct the liquidation process on distressed loans will pay more than borrowers in states with low costs of default. The biggest losers in such a move could be states like Florida, New Jersey and New York.
Litigation tracked by Mortgage Daily indicates that Florida’s judicial system puts up more roadblocks to completing residential foreclosures than any other state. Courts in Ohio and New Jersey are also a big problem for mortgage servicers. But it’s not just the judges that hinder the resolution of distressed mortgages. The foreclosure process itself delays liquidation of distressed properties and raises the cost of defaults. While the U.S. foreclosure process took an average of 378 days in the second quarter according to RealtyTrac, it took 1,056 days in New York — longer than any other state. New Jersey was the No. 2 worst state. Also impacting default costs are foreclosure inventory rates — which were highest in Florida, New Jersey and New York according to July 2012 data from CoreLogic. Illinois and Nevada were also among the states with the five-worst foreclosure rates.
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sketch of Edward J. DeMarco by Stephen McConnell
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While some states have a high share of negative-equity borrowers, that metric is not necessarily an indicator of greater default costs since 85 percent of upside-down borrowers were current on their mortgages during the second quarter according to another report from CoreLogic.
In a speech delivered Monday at the American Mortgage Conference in Raleigh, N.C., Federal Housing Finance Acting Director Edward J. DeMarco highlighted how Fannie and Freddie have been steadily increasing guarantee fees since being forced into conservatorship in September 2008. The gradual increase in g-fees — including an increase announced in December 2011 and another announced in April — are expected to reduce taxpayer risk and bring pricing more in line with private markets.
But up until now, the two secondary lenders have ignored local disparities that raise the cost of lending.
“The enterprises have long operated by essentially providing credit guarantee pricing that did not take into account differences in doing business in different parts of the country,” a prepared transcript of DeMarco’s speech said. “While this had benefits of broadly leading to a uniform mortgage price across the country, it also meant the enterprises would be absorbing, but not pricing for, added credit risk associated with specific state and local policies.”
DeMarco plans to soon release for public comment a report outlining a pricing approach that better captures the costs associated with state and local policies. He wants input about imposing an up-front fee on new residential originations in states where default-related costs are significantly higher than the national average.
Last month, FHFA said that g-fees would be raised more on 30-year mortgages than on 15-year loans to eliminate cross-subsidization currently in place that artificially reduces 30-year rates. Changes to g-fees are also being made to address higher-risk mortgages that are being subsidized by lower-risk loans.
