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Four states face sticker shock from g-fees, adverse market fees

December 11, 2013
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Four states failed to make the exclusive list of 46 states that no longer have to provide the upfront 25-basis point adverse market fee: New York, New Jersey, Connecticut and Florida.

The Federal Housing Finance Agency recently announced the expected rise in guaranteed fees, but in addition to the new hike, the FHA eliminated the adverse market fee in a majority of the U.S. states.   

"From the actual number standpoint there are three things we have to consider: the 10 basis point g-fee increase, the 25 bp adverse market fee elimination and the four states that don’t receive the elimination," Quicken Loans Chief Economist Bob Walters said.

Due to varying state laws and practices that govern the foreclosure process, there are significant discrepancies in the average length of time it takes a state to complete the foreclosure process. 

Fannie Mae and Freddie Mac, being the largest mortgage investors, have incurred significantly greater total carrying costs due to the lengthening of foreclosure timelines in recent years, the FHA said.

To combat this issue, the FHA said they would focus most on the extreme outlier states in terms of high carrying costs.

From these calculations, New York, New Jersey, Connecticut and Florida were left out since they maintain 'expected carrying costs' that are more than two standard deviations above the national average.

But those four lone states aside, due to the latest increase, lenders will increase their rates to offset the increased g-fees.  

"If the average mortgage stays around for five years, you would have to pay about 10 bp for 5 years," Walters said. As a result, “The average cost of a 30-year, fixed-rate mortgage went up by $500 on a $200,000 mortgage if the borrower stays in the loan for 5 years.”

"A 10-bp increase doesn’t change that much, and I don’t think it effects if you choose to buy a house of not," Walters said.

"However if you go back four years versus today, the average g-fee is up 40 bp, closing in on half a percentage point. Over the years, it has become pretty substantial,” he added.

While this may seem like a small hike in g-fees, it can add up overtime. Then factor in the four states that still have to pay the adverse market fee, and the numbers will start to pile up. 

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