The Federal Housing Finance Agency Shouldn’t Punish Borrowers for State Foreclosure Timelines
The Federal Housing Finance Agency, the regulator that oversees mortgage giants Fannie Mae and Freddie Mac, recently announced plans for the companies to charge higher fees on mortgages it securitizes and guarantees in five states—New York, Connecticut, Florida, Illinois, and New Jersey—because of long foreclosure timelines. According to the agency, it takes significantly longer to complete a foreclosure in those states compared to the rest of the country, which leads to higher costs for Fannie and Freddie. The fee targets state laws that the agency says prolong foreclosure timelines—many of which protect homeowners—such as requirements that foreclosures be pursued through the courts and rules governing mortgage servicer behavior.
In response, the Center for American Progress submitted comments for the public record, which were co-signed by several groups and individuals. Below is a summary of those comments. The official comment letter can be downloaded here.
We appreciate the importance and complexity of the Federal Housing Finance Agency’s mandate to preserve the assets of Fannie Mae and Freddie Mac, protect taxpayers from excessive losses, and promote a liquid and resilient U.S. housing market. Setting a financially responsible guarantee fee—the fee that Fannie and Freddie charge lenders for their services, including guaranteeing the payment of principal and interest on securities—is one of the agency’s many critical responsibilities.
In addition, we recognize that foreclosure timelines extending long beyond the time periods required by state law can have a harmful impact not only on investors but also on neighborhoods and families. Unnecessary foreclosure delays can postpone the disposition of abandoned homes or homes that are not properly maintained, which contributes to neighborhood blight, the spillover costs associated with such blight, and the unavailability of housing stock for new families.
At the same time, a rush to foreclosure without an opportunity or effort to engage in loss mitigation also damages investors (such as Fannie and Freddie), neighborhoods, and families. In many cases, a homeowner will prove eligible for a loan modification that has a positive net present value for the investor.
Even when a loan modification is not possible, other foreclosure alternatives result in a greater recovery by the investor than a foreclosure sale and require no subsequent foreclosure-related expenditures. These alternatives include:
- Short sales—home sales where banks and investors agree to sell a property for less than the amount owed to them in order to avoid the foreclosure process
- Deeds-in-lieu—situations where borrowers surrender their deeds on a property to lenders in order to avoid foreclosure
What’s more, increasing costs to new homebuyers and making home buying unaffordable may well derail a housing recovery that will help investors, neighborhoods, and families.
Thus, while we agree that addressing these unnecessarily elongated timelines is important, we do not think a state-level guarantee fee premium—an additional fee leveled on Fannie and Freddie-backed mortgages in particular states—is the correct solution for the following reasons.
The proposal targets the wrong problem and penalizes the wrong actors
The justification for a state-level guarantee fee appears to rest on the assumption that state laws are primarily to blame for excessive foreclosure timelines. The proposal suggests, for example, that “if those states were to adjust their laws and requirements to move their foreclosure timelines and costs more in line with the national average, the state-level, risk-based fees … would be lowered or eliminated.”
There are many contributors to delay, however—chief among them servicer-related delays. Some servicer delays are deliberate, some relate to lack of servicer capacity and/or competence, and some relate to servicer inability or unwillingness to follow legal requirements, as demonstrated by the fraudulent papers submitted to courts under the practice now known as “robosigning.” Many long foreclosure timelines are not due to the existence of a particular law—rather, they are due to the failure to comply with laws.
The proposal ventures into dangerous waters by pricing for risk posed by completely exogenous factors
It is well known that Fannie and Freddie make distinctions among products and borrower characteristics for the purposes of pricing. While debate continues about the appropriate extent of such risk-based pricing, at least distinctions related to the individual loan product or borrower are under the control of the borrower or the originator. Pricing for risks unrelated to the individual loan or borrower—depending on exogenous factors not under their control—is a completely different undertaking.
The risk-based pricing proposed here by the Federal Housing Finance Agency is particularly troubling because it relates to a factor entirely out of the control of both borrowers and originators with no limiting principle. How will the agency determine which external risk factors justify a risk premium? High unemployment, for example, is widely considered to drive an increase in foreclosure activity. Will the agency impose additional premiums on loans made in states with high unemployment rates?
The proposal’s methodology for identifying the states to penalize is fundamentally flawed and double-charges for the costs imposed by lengthy timelines
The Federal Housing Finance Agency’s proposal is grounded on the assumption that longer foreclosure timelines cause bigger losses for Fannie Mae and Freddie Mac. But the agency’s methodology fails to account for numerous other variables that influence the ultimate cost to these two enterprises—even while the agency likely has access to more data related to these variables than most other market participants or observers—and therefore does not provide support for this proposition.
The methodology fails to consider, for example, whether certain state laws actually save Fannie and Freddie money by preventing unnecessary foreclosures. What’s more, there is no analysis at all to demonstrate that state laws are causing the foreclosure delays rather than servicer behavior or volume, nor that the costs incurred during a “normal” market would justify the proposed increases.
For these reasons, we oppose the implementation of the proposal and strongly suggest that it be withdrawn. Alternatively, if the Federal Housing Finance Agency does not withdraw the proposal, we suggest that the agency significantly revise the methodology for assessing the cost of delays and for identifying the states impacted.
Download the full comment letter here.
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