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FHFA Proposal Seeks To Penalize Illinois Home Buyers


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.

But why?

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 these servicers.

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.