[Federal Register Volume 77, Number 186 (Tuesday, September 25, 2012)]
[Notices]
[Pages 58991-58994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-23531]


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FEDERAL HOUSING FINANCE AGENCY

[No. 2012-N-13]


State-Level Guarantee Fee Pricing

AGENCY: Federal Housing Finance Agency.

ACTION: Notice; input accepted.

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    The Federal Housing Finance Agency (FHFA) oversees the operations 
of Fannie Mae and Freddie Mac (``the Enterprises''). The Enterprises 
are in conservatorships, and, as Conservator, FHFA has statutory 
obligations in its conduct of the conservatorships, including 
preserving and conserving assets. Though the Enterprises are 
congressionally chartered and federally supervised and regulated, state 
laws and practices can have a significant impact on their loan default 
costs.
    This Notice sets forth an approach to adjust the guarantee fees 
(``g-fees'') that the Enterprises charge for mortgages that finance 
properties with one to four units (``single-family mortgages'') in 
certain states to recover a portion of the exceptionally high costs 
that the Enterprises incur in cases of mortgage default in those 
states.

Background

    The Enterprises charge g-fees to compensate for the credit risks 
they undertake when they own or guarantee mortgages. The g-fees the 
Enterprises currently charge on single-family mortgages vary with the 
type of loan product and with loan and borrower attributes that affect 
credit risk. FHFA has a responsibility to ensure that those fees are 
proper and adequate. The single-family g-fees that the Enterprises 
charged prior to conservatorship proved inadequate to compensate for 
the level of actual credit losses they experienced. This contributed 
directly to substantial financial support being provided to the two 
companies by taxpayers.
    G-fee payments to Fannie Mae and Freddie Mac generally include both 
ongoing monthly payments and an upfront payment at the time of 
Enterprise loan acquisition. Current Enterprise schedules for upfront 
g-fees may be found at https://www.efanniemae.com/sf/refmaterials/llpa/pdf/llpamatrix.pdf and http://www.freddiemac.com/singlefamily/pdf/ex19.pdf.
    Recent experience has shown a wide variation among states in the 
costs that the Enterprises incur from mortgage defaults. This is due, 
in large part, 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. Further, in some 
states the investor cannot market a property for a period after 
foreclosure is complete. There is also variation among the states in 
the per-day carrying costs that investors incur during the periods when 
a defaulted loan is non-performing 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. 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.
    The principal drivers of differences across states in the average 
total carrying costs to the Enterprises of a defaulted single-family 
mortgage are, in order of importance--
    1. The length of time needed to secure marketable title to the 
property;
    2. Property taxes that must be paid until marketable title is 
secured; and
    3. Legal and operational expenses during that period.

There is a wide variation among states in all three of those variables.
    In light of these cost differentials, FHFA's March 2012 
Conservatorship Scorecard set forth the objective for Fannie Mae and 
Freddie Mac of developing appropriate risk-based guarantee fee pricing 
by state. FHFA's proposal described here would adjust the upfront fees 
that the Enterprises charge when they acquire single-family mortgages 
in states where Enterprise costs that are related to state foreclosure 
practices are statistically higher than the national average. The size 
of the adjustments would reflect differences in costs in those states 
from the average.
    FHFA recognizes that the data the Enterprises have used to 
calculate state-level cost differences in this proposal are based on a 
combination of Enterprise experience and estimation. Actual costs 
incurred by the Enterprises in the future may vary over time and among 
individual defaults within a state. Because of this variability, FHFA's 
planned approach focuses on five states that are clear outliers among 
states in terms of their default-related costs.
    This document outlines the approach that FHFA is considering and 
discusses potential additions and changes to the calculation of such 
fees in the future. Through this Notice, FHFA is providing an 
opportunity for public input on these subjects. After reviewing the 
public input and determining a final state-level guarantee fee pricing 
method, FHFA expects to direct the Enterprises to implement the pricing 
adjustments in 2013.

Approach to State-Level G-Fee Adjustments

    The approach set forth in this Notice is based on Enterprise 
experience and does not include the forward-looking impact of recently-
enacted state and local laws that may increase the Enterprises' costs. 
FHFA intends to periodically reassess state-level pricing based on 
updated Enterprise data. The agency may include the impact of newly-
enacted laws if they clearly affect foreclosure timelines or costs, 
where such costs may be reasonably estimated based on relevant 
experience.
    FHFA's approach would focus on the small number of states that have 
average total carrying costs that significantly exceed the national 
average and, therefore, impose the greatest costs on Fannie Mae, 
Freddie Mac, and taxpayers. Mortgages originated in these highest-cost 
states 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 the Enterprises after implementation. Based on current 
data as described below, those five states are Connecticut, Florida, 
Illinois, New Jersey, and New York.
    Lenders may pass an upfront fee through to a borrower as an 
adjustment to the interest rate on the borrower's loan. Because the 
upfront fee is paid only once, its impact on the annual interest rate 
is much smaller than the

[[Page 58992]]

upfront fee itself. Dividing the upfront fee by five provides an 
approximation of the potential impact on the interest rate. To 
illustrate, a 15 basis point upfront fee, if fully passed through by 
the lender, would be roughly equivalent to an increase in the annual 
interest rate of three basis points. Under FHFA's planned approach, a 
homeowner in an affected state obtaining a 30-year, fixed-rate mortgage 
of $200,000 could see an increase of approximately $3.50 to $7.00 in 
his or her monthly mortgage payment, reflecting a range of upfront fee 
adjustments of 15 to 30 basis points.
    The methodology used by the agency to develop the planned approach 
addresses only differences in the expected cost of defaults associated 
with single-family mortgages that will be acquired by the Enterprises 
in the future and are underwritten according to current standards. If 
FHFA had developed an approach using information on the realized 
default losses on loans the Enterprises acquired in the past decade, 
which were originated under less stringent underwriting guidelines, the 
increases in upfront fees in the states affected would be significantly 
greater, because recently acquired mortgages are expected to default at 
lower rates due to strengthened underwriting standards.

Methodology

    The methodology used to develop the planned approach to state-level 
g-fee pricing relies on three key factors. The first is the expected 
number of days that it takes an Enterprise to foreclose and obtain 
marketable title to the collateral backing a mortgage in a particular 
state. The second is the average per-day carrying cost that the 
Enterprises incur in that state. The third is the expected national 
average default rate on single-family mortgages acquired by the 
Enterprises. To estimate the magnitude of the state-level differences 
in average total carrying cost, the estimation assumes that loans 
originated in each state will default at the national average default 
rate.
    The table below, titled ``Estimated Time to Obtain Marketable Title 
and Cost per Day Relative to the National Average,'' provides 
information on the time periods and costs used to develop the proposed 
fees. The column titled ``Foreclosure Timeline in Days'' shows, for 
each state, the target number of days after the last paid installment 
on a mortgage for a loan servicer to complete the foreclosure sales 
process. Those timelines are published in each Enterprise's servicing 
guide and are reviewed and updated as necessary every six months. The 
timelines shown in the column were published in June 2012 at https://www.efanniemae.com/sf/guides/ssg/relatedservicinginfo/pdf/foreclosuretimeframes.pdf and http://www.freddiemac.com/learn/pdfs/service/exhibit83.pdf.
    The timelines are periods within which Enterprise servicers are 
expected to complete the foreclosure process for mortgages that did not 
qualify for loan modification or other loss mitigation alternatives. 
The timelines are derived from an analysis of the Enterprises' actual 
experience with foreclosure processing in each state, adjusted for 
existing statutory requirements and certain changes in law or practice 
during the historical period. The published timelines also take into 
account the effects that foreclosure moratoriums or other extenuating 
circumstances and lender-specific delays outside the expected norms for 
that state may have had on actual foreclosure timelines.

           Estimated Time To Obtain Marketable Title and Cost per Day Relative to the National Average
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                                                     Estimated                     Cost per day
                                    Foreclosure       average      Total time to    relative to     Rank (total
            State \1\               timeline in    ``unable-to-       obtain       the national    time * cost)
                                     days \2\      market'' time    marketable      average \3\         \4\
                                                      in days      title in days        (%)
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AK..............................             300               0             300              93              11
AL..............................             270               0             270              93               2
AR..............................             280               0             280             102              13
AZ..............................             300               0             300              84               3
CA..............................             300               0             300              90               7
CO..............................             330               0             330              85              12
CT..............................             690               0             690             109              52
DC..............................             300               0             300              86               5
DE..............................             480               0             480              83              27
FL..............................             660               0             660             111              51
GA..............................             270               0             270             101               9
GU..............................             500               0             500             100              38
HI..............................             500              90             590              79              35
IA..............................             480               0             480             110              42
ID..............................             440               0             440              88              26
IL..............................             480              60             540             118              50
IN..............................             480               0             480             107              40
KS..............................             330              90             420             108              33
KY..............................             420              30             450              97              32
LA..............................             390               0             390             106              29
MA..............................             350               0             350              97              22
MD..............................             485             120             605              97              49
ME..............................             570               0             570              95              44
MI..............................             270             180             450             118              43
MN..............................             270             180             450              96              30
MO..............................             270               0             270             109              17
MS..............................             270               0             270             107              14
MT..............................             360               0             360              88              20
NC..............................             300               0             300              91              10
ND..............................             405              60             465             109              39
NE..............................             330               0             330             114              25
NH..............................             270               0             270             110              18

[[Page 58993]]

 
NJ..............................             750               0             750             113              53
NM..............................             450              60             510              91              34
NV..............................             360               0             360              83              19
NY..............................             820               0             820             112              54
OH..............................             450              30             480             114              45
OK..............................             420               0             420             104              31
OR..............................             330               0             330              88              16
PA..............................             480               0             480             108              41
PR..............................             720               0             720              68              37
RI..............................             330               0             330             107              23
SC..............................             420               0             420              95              28
SD..............................             360             180             540             105              46
TN..............................             270               0             270              96               6
TX..............................             270               0             270             132              24
UT..............................             330               0             330              82               8
VA..............................             270               0             270              87               1
VI..............................             510               0             510              93              36
VT..............................             510              30             540             105              47
WA..............................             330               0             330              88              15
WI..............................             480              30             510             113              48
WV..............................             290               0             290              87               4
WY..............................             270             120             390              86              21
National Average (UPB Weighted).             396              17             413             100
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\1\ Includes the District of Columbia and certain U.S. territories. The Enterprises do not currently acquire
  loans in the Northern Mariana Islands or American Samoa.
\2\ Foreclosure time frames are available online at: https://www.efanniemae.com/sf/guides/ssg/relatedservicinginfo/pdf/foreclosuretimeframes.pdf and http://www.freddiemac.com/learn/pdfs/service/exhibit83.pdf.
\3\ Cost per day is expressed as an index relative to the UPB-weighted national average, where 100% represents
  the average cost. It excludes HARP loans.
\4\ Rank is a function of the total time to obtain marketable title multiplied by the indexed cost. The product
  for each state is indicative of the relative total carrying cost upon which FHFA would base its adjustments to
  upfront fees. ``1'' represents the lowest-cost area and ``54'' the highest-cost area.

    The column titled ``Estimated Average `Unable-to-Market' Time in 
Days'' shows Enterprise estimates of the additional time after the 
foreclosure sale date in certain states before an Enterprise can begin 
to market and sell the property. These additional periods of time are 
often due to a statutorily set post-foreclosure ``redemption period'' 
that allows a borrower to redeem or recover the property by paying off 
the defaulted loan, or are due to other court-mandated procedures that 
otherwise prevent an Enterprise from marketing and selling the 
foreclosed property. These time estimates were based on recent 
Enterprise experience and state law.
    The column titled ``Total Time to Obtain Marketable Title in Days'' 
provides the sum of the number of days shown in the two preceding 
columns, which equals the estimated average length of time from the 
date of the last mortgage payment to the date on which the foreclosed 
property is eligible to be marketed for sale. Although these times are 
based on recent data, they do not reflect changes to state laws that 
have not been in effect long enough to influence the foreclosure 
timelines published by the Enterprises.
    The second factor used in the estimation is the per-day carrying 
cost incurred by the Enterprises on non-performing loans, which varies 
across the states. That cost includes property taxes, legal expenses, 
hazard insurance, costs related to maintenance and property repairs, 
and the Enterprises' costs of financing a non-performing mortgage. 
These costs were estimated using recent data. State and local 
government decisions can significantly affect the carrying cost per 
day, especially with respect to property taxes.
    The column titled ``Cost per Day Relative to the National Average'' 
shows a state-by-state index of estimated per-day carrying costs per 
dollar of unpaid principal balance, where the national average equals 
100 percent. Those index values were derived from separate estimates 
from each Enterprise, which FHFA weighted on the basis of the 
Enterprises' respective market shares in recent years.
    The column titled ``Rank'' shows the total time to obtain 
marketable title multiplied by the indexed per-day carrying cost. For 
each state, this product is indicative of the relative total carrying 
costs upon which the agency would base its adjustments to upfront fees 
under the planned approach. The states, District of Columbia, and 
territories are ranked, with ``1'' representing the lowest-cost area 
and ``54'' the highest-cost area.
    The first two factors--days to obtain marketable title and per-day 
carrying costs--provide estimates of the total carrying cost of a 
defaulted mortgage, by state. The third factor used in the methodology 
is the expected national average default rate on single-family 
mortgages acquired by the Enterprises. This was estimated using the 
national book of business acquired by Fannie Mae and Freddie Mac in the 
first half of 2012. Since the national average default rate is used in 
the estimation, the upfront fees that the Enterprises would impose on 
loans originated in certain states, under FHFA's planned approach, are 
not affected by any variation that may exist at the state level in the 
credit quality of loans acquired by the Enterprises, expected future 
house price movements, or other factors that may affect the likelihood 
of loan default.

[[Page 58994]]

    The methodology combines the three factors with appropriate rates 
of discount to produce present-value estimates of expected total 
default-related carrying costs for a new mortgage in each state. Those 
state-level estimates were produced separately by Fannie Mae and 
Freddie Mac. FHFA weighted each Enterprise's estimates by its 
respective market share in recent years to produce a single set of 
estimates. FHFA then calculated the standard deviation from the mean of 
the state-level estimates of expected total default-related carrying 
costs, which was found to be 10 basis points.
    The planned approach focuses on the small number of states that 
have expected total default-related carrying costs that significantly 
exceed the national average and, thus, cause the greatest increase in 
average loss given default. Based on current data, loans in five states 
would be assessed upfront fees. The state between one and one half and 
two standard deviations from the mean, Illinois, would have an upfront 
fee of 15 basis points. The states between two and three standard 
deviations from the mean, Florida, Connecticut, and New Jersey, would 
have an upfront fee of 20 basis points. The state more than three 
standard deviations from the mean, New York, would have an upfront fee 
of 30 basis points.
    This approach would allow for variation in practice among the 
states and impose upfront fees only on those states that are 
statistical outliers from the rest of the country. If those states were 
to adjust their laws and requirements sufficiently to move their 
foreclosure timelines and costs more in line with the national average, 
the state-level, risk-based fees imposed under the planned approach 
would be lowered or eliminated. The approach recognizes that each state 
establishes legal requirements governing foreclosure processing that it 
judges to be appropriate for its residents. It also recognizes that 
unusual costs associated with practices outside of the norm in the rest 
of the country should be borne by the citizens of that particular state 
rather than absorbed by borrowers in other states or by taxpayers.

Future Changes to State-Level G-Fee Adjustments

    The planned approach bases state-level adjustments to upfront fees 
on past experience and a limited range of cost variables. FHFA would 
consider, in the future, changes to its methodology to address 
additional variables. For example, these could include estimates of the 
impact of recently-enacted laws and ordinances. Such calculations would 
be based on experience with similar laws and ordinances and their 
effects on per-day carrying costs. FHFA could also include a wider 
range of state actions in its methodology. For example, FHFA could 
consider state laws and ordinances affecting the disposition of 
acquired real estate following a default, commonly referred to as real 
estate owned (REO), and address attendant costs created by state and 
local rules that impose charges above a certain amount or impose duties 
that add to the costs of the Enterprises. The Enterprises, therefore, 
could undertake revisions to their state-level g-fees based on 
experience gained with additional measurement devices.

Input

    FHFA invites input from any person with views on the planned 
approach and on potential future changes to state-level g-fee 
adjustments. In particular, FHFA is interested in the following three 
questions:
    1. Is standard deviation a reasonable basis for identifying those 
states that are significantly more costly than the national average?
    2. Should finer distinctions be made between states than the 
approach described here?
    3. Should an upfront fee or an upfront credit be assessed on every 
state based on its relationship to the national average total carrying 
cost, such that the net revenue effect on the Enterprises is zero?
    FHFA will accept public input through its Office of Policy Analysis 
and Research (OPAR), no later than November 26, 2012, as the agency 
moves forward with its deliberations on appropriate action. 
Communications may be addressed to FHFA OPAR, 400 Seventh Street SW., 
Ninth Floor, Washington, DC 20024, or emailed to [email protected]. 
Communications to FHFA may be made public and would include any 
personal information provided.

    Dated: September 19, 2012.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2012-23531 Filed 9-24-12; 8:45 am]
BILLING CODE 8070-01-P