Alert October 02, 2012

FHFA Imposes Higher Origination Costs for Mortgages Backed by GSEs in Five States

The Federal Housing Finance Agency announced proposed guarantee fee pricing adjustments in Connecticut, Florida, Illinois, New Jersey and New York for mortgages owned or guaranteed by Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac charge guarantee fees in the form of upfront payments and ongoing payments to compensate for the credit risks they undertake when they own or guarantee mortgages. The proposed fee increases in the five states, which would take effect in 2013, result from higher default/foreclosure-related carrying costs compared to the national average. Factors that the FHFA considered important in this decision were the length of time needed to obtain marketable title, property taxes that must be paid during the period after foreclosure, and legal and operational expenses incurred during that same period after foreclosure. As a result of variances from the national average, the FHFA is proposing to increase upfront guarantee fees by 15 basis points in Illinois; 20 basis points in Florida, Connecticut and New Jersey; and 30 basis points in New York. The increased guarantee fees can be passed along to borrowers in the interest rate, which would result in increased monthly payments on a 30-year, fixed-rate mortgage of $200,000 of $3.50 to $7.00.

The FHFA is also seeking public input regarding: (1) whether the standard deviation is a reasonable basis for identifying states that are significantly more costly than the national average; (2) whether finer distinctions should be made between states; and (3) whether an upfront fee or an upfront credit should be assessed in every state based on its relationship to the national average. Comments are due by November 26, 2012.