[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