State-Level Guarantee Fee Pricing, 58991-58994 [2012-23531]
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Federal Register / Vol. 77, No. 186 / Tuesday, September 25, 2012 / Notices
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[FR Doc. 2012–23535 Filed 9–24–12; 8:45 am]
BILLING CODE 6712–01–P
FEDERAL HOUSING FINANCE
AGENCY
[No. 2012–N–13]
State-Level Guarantee Fee Pricing
Federal Housing Finance
Agency.
ACTION: Notice; input accepted.
AGENCY:
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.
emcdonald on DSK67QTVN1PROD with NOTICES
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
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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 https://
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 singlefamily 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
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58991
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 statelevel 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
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58992
Federal Register / Vol. 77, No. 186 / Tuesday, September 25, 2012 / Notices
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, fixedrate 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 singlefamily 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 https://
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
Foreclosure
timeline in
days 2
emcdonald on DSK67QTVN1PROD with NOTICES
State 1
AK ........................................................................................
AL .........................................................................................
AR ........................................................................................
AZ .........................................................................................
CA ........................................................................................
CO ........................................................................................
CT ........................................................................................
DC ........................................................................................
DE ........................................................................................
FL .........................................................................................
GA ........................................................................................
GU ........................................................................................
HI ..........................................................................................
IA ..........................................................................................
ID ..........................................................................................
IL ..........................................................................................
IN ..........................................................................................
KS ........................................................................................
KY ........................................................................................
LA .........................................................................................
MA ........................................................................................
MD ........................................................................................
ME ........................................................................................
MI .........................................................................................
MN ........................................................................................
MO .......................................................................................
MS ........................................................................................
MT ........................................................................................
NC ........................................................................................
ND ........................................................................................
NE ........................................................................................
NH ........................................................................................
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Estimated
average
‘‘unable-tomarket’’
time in days
300
270
280
300
300
330
690
300
480
660
270
500
500
480
440
480
480
330
420
390
350
485
570
270
270
270
270
360
300
405
330
270
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Total time
to obtain
marketable
title in days
0
0
0
0
0
0
0
0
0
0
0
0
90
0
0
60
0
90
30
0
0
120
0
180
180
0
0
0
0
60
0
0
E:\FR\FM\25SEN1.SGM
300
270
280
300
300
330
690
300
480
660
270
500
590
480
440
540
480
420
450
390
350
605
570
450
450
270
270
360
300
465
330
270
25SEN1
Cost per
day relative
to the
national
average 3 (%)
93
93
102
84
90
85
109
86
83
111
101
100
79
110
88
118
107
108
97
106
97
97
95
118
96
109
107
88
91
109
114
110
Rank (total
time * cost) 4
11
2
13
3
7
12
52
5
27
51
9
38
35
42
26
50
40
33
32
29
22
49
44
43
30
17
14
20
10
39
25
18
58993
Federal Register / Vol. 77, No. 186 / Tuesday, September 25, 2012 / Notices
ESTIMATED TIME TO OBTAIN MARKETABLE TITLE AND COST PER DAY RELATIVE TO THE NATIONAL AVERAGE—Continued
Foreclosure
timeline in
days 2
State 1
NJ .........................................................................................
NM ........................................................................................
NV ........................................................................................
NY ........................................................................................
OH ........................................................................................
OK ........................................................................................
OR ........................................................................................
PA ........................................................................................
PR ........................................................................................
RI ..........................................................................................
SC ........................................................................................
SD ........................................................................................
TN ........................................................................................
TX .........................................................................................
UT ........................................................................................
VA ........................................................................................
VI ..........................................................................................
VT .........................................................................................
WA .......................................................................................
WI .........................................................................................
WV .......................................................................................
WY .......................................................................................
National Average (UPB Weighted) ......................................
Estimated
average
‘‘unable-tomarket’’
time in days
750
450
360
820
450
420
330
480
720
330
420
360
270
270
330
270
510
510
330
480
290
270
396
Total time
to obtain
marketable
title in days
0
60
0
0
30
0
0
0
0
0
0
180
0
0
0
0
0
30
0
30
0
120
17
750
510
360
820
480
420
330
480
720
330
420
540
270
270
330
270
510
540
330
510
290
390
413
Cost per
day relative
to the
national
average 3 (%)
113
91
83
112
114
104
88
108
68
107
95
105
96
132
82
87
93
105
88
113
87
86
100
Rank (total
time * cost) 4
53
34
19
54
45
31
16
41
37
23
28
46
6
24
8
1
36
47
15
48
4
21
emcdonald on DSK67QTVN1PROD with NOTICES
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 https://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 highestcost 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 courtmandated 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
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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 nonperforming 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 perday 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
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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.
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58994
Federal Register / Vol. 77, No. 186 / Tuesday, September 25, 2012 / Notices
emcdonald on DSK67QTVN1PROD with NOTICES
The methodology combines the three
factors with appropriate rates of
discount to produce present-value
estimates of expected total defaultrelated 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 statelevel, 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 statelevel 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
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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 statelevel 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
gfeeinput@fhfa.gov. 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
FEDERAL TRADE COMMISSION
Agency Information Collection
Activities; Submission for OMB
Review; Comment Request
Federal Trade Commission
(‘‘FTC’’ or ‘‘Commission’’).
ACTION:
Notice.
The FTC intends to ask the
Office of Management and Budget
(‘‘OMB’’) to extend through November
30, 2015, the current Paperwork
Reduction Act (‘‘PRA’’) clearance for the
information collection requirements in
the FTC Red Flags/Card Issuers/Address
Discrepancies Rules 1 (‘‘Rules’’). That
clearance expires on November 30,
2012.
DATES: Comments must be submitted by
October 25, 2012.
ADDRESSES: Interested parties may file a
comment online or on paper, by
following the instructions in the
Request for Comment part of the
SUPPLEMENTARY INFORMATION section
below. Write ‘‘Red Flags Rule, PRA2
Comment, Project No. P095406’’ on your
comment, and file your comment online
at https://ftcpublic.commentworks.com/
ftc/RedFlagsPRA2 by following the
instructions on the web-based form. If
you prefer to file your comment on
paper, mail or deliver your comment to
the following address: Federal Trade
Commission, Office of the Secretary,
Room H–113 (Annex J), 600
Pennsylvania Avenue NW., Washington,
DC 20580.
FOR FURTHER INFORMATION CONTACT:
Requests for additional information
should be addressed to Steven Toporoff,
Attorney, Division of Privacy and
Identity Protection, Bureau of Consumer
Protection, Federal Trade Commission,
600 Pennsylvania Avenue NW., NJ–
3158, Washington, DC 20580.
Telephone: (202) 326–2252.
SUPPLEMENTARY INFORMATION:
Title: Red Flags Rule, 16 CFR 681.1;
Card Issuers Rule, 16 CFR 681.2;
Address Discrepancy Rule, 16 CFR Part
641.
OMB Control Number: 3084–0137.
Type of Review: Extension of
currently approved collection.
Abstract: The Red Flags Rule requires
financial institutions and certain
creditors to develop and implement
written Identity Theft Prevention
Programs. The Card Issuers Rule
requires credit and debit card issuers to
assess the validity of notifications of
address changes under certain
circumstances. The Address
Discrepancy Rule provides guidance on
what users of consumer reports must do
when they receive a notice of address
discrepancy from a nationwide
consumer reporting agency.
Collectively, these three anti-identity
theft provisions are intended to prevent
impostures from misusing another
SUMMARY:
AGENCY:
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CFR 681.1; 16 CFR 681.2; 16 CFR Part 641.
25SEN1
]]>Agencies
[Federal Register Volume 77, Number 186 (Tuesday, September 25, 2012)]
[Notices]
[Pages 58991-58994]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-23531]
=======================================================================
-----------------------------------------------------------------------
FEDERAL HOUSING FINANCE AGENCY
[No. 2012-N-13]
State-Level Guarantee Fee Pricing
AGENCY: Federal Housing Finance Agency.
ACTION: Notice; input accepted.
-----------------------------------------------------------------------
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 https://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 https://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
----------------------------------------------------------------------------------------------------------------
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 (%)
----------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
\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 https://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 gfeeinput@fhfa.gov.
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
