The FHFA, which is the agency that oversees Fannie and Freddie, has proposed
a mortgage surcharge for five states -- one of which is Illinois. Under
the proposal, loans backed by Freddie or Fannie would carry a .3% upcharge
if the loans were issued for properties located in Illinois, New York,
New Jersey, Florida, and Connecticut.
According to the FHFA, Freddie and Fannie lose money when properties in
these states go into foreclosure. FHFA's theory is that the judicial
foreclosure process delays foreclosures in these states, which in turn
causes Freddie and Fannie to lose money.
What the FHFA does not take into account is that the mortgage servicers
that service Fannie and Freddie's loans make more money the longer
a loan is in default or in foreclosure. This is because servicers get
paid based on two main metrics: 1) the value of the loan and 2) the fees
that they charge. The longer a loan is in foreclosure, the longer the
servicer can apply fees. Slowing down the foreclosure process benefits
Alan White of Public Citizen
has posted some interesting analysis of the FHFA's claims. Most interesting is
his analysis of the claim that these delays result in a loss of revenue
for Fannie and Freddie. As he points out, if a foreclosure ends in a short
sale or a loan modification, then loss is mitigated, not increased. He
also notes that states with longer foreclosure timelines tend to have
a higher rate of successful loss mitigation efforts.
Hopefully we'll see this proposal abandoned for something that makes
more sense -- you know, like a policy where FHFA endorses principal writedowns
for underwater borrowers.