The Federal Housing Finance Agency is targeting five states in its plan to adjust the guarantee fees Fannie Mae and Freddie Mac charge for single-family mortgages. It hopes to recover a portion of the “exceptionally high costs” the GSEs incur in cases of mortgage default in those states.
The five states are Connecticut, Florida, Illinois, New Jersey and New York.
The FHFA says these states hold average total carrying costs that “significantly exceed” the national average and, therefore, impose the greatest costs on the GSEs and taxpayers.
Mortgages originated in those territories would have an upfront fee of between 15 and 30 basis points, which would be charged to lenders as a one-time upfront payment on each loan acquired by Fannie or Freddie after implementation.
Under FHFA’s planned approach, homeowners in an affected state obtaining a 30-year, fixed rate mortgage of $200,000 could see an increase of $3.50 to $7 in their monthly mortgage payment.
The GSEs charge g-fees to compensate for the credit risks they undertake when they own or guarantee mortgages. The g-fees charged on single-family mortgages vary with the type of loan product and with loan and borrower attributes that affect credit risk.
In a letter signed by FHFA Acting Director Edward DeMarco and submitted to the Federal Register, the agency points to a wide variation among states in the costs Fannie and Freddie incur from mortgage defaults. This is due, in large part, the letter states, to differences among the states and territories in the requirements for lenders or other investors to manage a default, foreclose and obtain marketable title to the property backing a single-family mortgage.
Foreclosure takes longer than average in some states as a result of regulatory or judicial actions, and in some states the investor cannot market a property for a period after foreclosure is complete. The FHFA cites variation among the states in the per-day carrying costs that investors incur during the periods when a defaulted loan is nonperforming and, in some states, when a foreclosed property cannot be marketed.
“Those variations in time periods and per-day carrying costs interact to contribute to state-level differences in the average total carrying cost to investors of addressing a loan default,” the FHFA writes.
“Because the enterprises currently set their g-fees nationally, accounting for expected default costs only in the aggregate, borrowers in states with lower default-related carrying costs are effectively subsidizing borrowers in states with higher costs,” it adds.