Concerned by the slow pace of foreclosures in Connecticut, the Federal Housing Finance Agency is proposing an additional fee on mortgages written in the state that could cost home buyers thousands of dollars.
Connecticut is among five states facing an increase on “guarantee” fees charged by Fannie Mae and Freddie Mac, the government-backed mortgage finance giants that buy up a large portion of the nation’s home loans.
Such fees, which are regulated by the Federal Housing Finance Agency (FHFA), are charged on mortgages purchased by Fannie Mae and Freddie Mac to recover a portion of the costs that result from mortgage defaults.
FHFA is proposing to increase the upfront guarantee fees in Connecticut, New York, New Jersey, Illinois, and Florida by 0.15 to 0.3 percent because the foreclosure process in those states take the longest. The higher fee would be charged to lenders and passed onto home buyers who would pay thousands of dollars extra over the life of a 30-year mortgage, banking experts said.
Foreclosures in Connecticut, which require lenders to get court approval before they can take possession of a home, are estimated to take about 690 days to go through the legal process, according to Fannie Mae. That is the fourth longest timeframe in the nation.
New York ranks No. 1 with the average foreclosure case taking 820 days to be completed. The shortest time frame for foreclosures is 270 days, which occurs in several states including New Hampshire, Minnesota and Missouri.
FHFA says the higher fees help make up for the higher costs associated with drawn out foreclosure cases, which delays lenders from being able to take title to and resell a property.
Attorney General George Jepsen, the state’s entire Congressional delegation, and several state lawmakers and housing advocacy groups have submitted letters to FHFA strongly opposing the proposed fee increase, arguing it would punish the state for having strong protections in place to homeowners facing foreclosure.
In particular, the issue puts the spotlight on Connecticut’s foreclosure mediation program, which was adopted in 2008 at the height of the foreclosure crisis.
The mediation program requires Connecticut borrowers and lenders to get together to try to achieve a mutually agreeable resolution to avoid a foreclosure.
The program has gained national attention for its success in helping prevent nearly 10,000 foreclosures in the state since 2008; however it has lengthened the foreclosure process, much to the chagrin of the banking community.
In a letter to FHFA, Jepsen said increasing the guarantee fees in Connecticut unfairly burdens borrowers and fails to recognize that it is the loan servicers who are often to blame for delaying the foreclosure process.
“The loan servicers routinely fail to comply with statutory provisions and court standing orders designed to ensure the efficiency and effectiveness of Connecticut’s mediation program,” Jepsen wrote.
The state’s mediation program, which became mandatory in 2011, does not require parties to come an agreement, but it does require a lender and borrower to meet face to face to try to work out a deal on a delinquent loan.
According to the Connecticut Judicial Branch, 82 percent of borrowers who participate in the state’s mediation program have reached some type of settlement with their lender. That includes 9,313 cases where the borrower has been able to avoid foreclosure and keep their home.
There are another 2,000 borrowers who lost their home, but were able to negotiate a short sale or deed in lieu of foreclosure.
State lawmakers adopted several other programs besides the mediation program in 2008 to help borrowers facing foreclosure. In his letter to FHFA, Jepsen said prolonged foreclosures are typically the fault of loan servicers who sometimes show up to mediation sessions unprepared or send employees who lack the authority to settle a case.
Guarantee fee payments to Fannie and Freddie typically include both ongoing monthly payments and an upfront payment at the time of the loan acquisition. FHFA’s proposed fee increase of .15 to .3 percent would only apply to the one- time upfront payment.
Under FHFA’s proposal, a homeowner 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.
One of the major reasons Fannie Mae and Freddie Mac were forced into conservatorship during the 2008 financial crisis was because both organizations did not charge adequate fees for the level of credit losses they experienced, according to FHFA.
“Recent experience has shown a wide variation among states in the costs that [Fannie and Freddie] incur from mortgage defaults,” FHFA said in its proposal to increase the guarantee fees. “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.”
Thomas Mongellow, a lobbyist for the Connecticut Bankers Association, said the fee increase would be a hit to consumers in the state.
In 2011, the average guarantee fee was about .28 percent to .3 percent, but FHFA recently raised the fee on all borrowers by about .1 percent, Mongellow said. An additional increase of .15 to .3 percent would cost Connecticut borrowers up to $12,000 more over the life of a 30-year mortgage.
“It’s pretty significant,” Mongellow said.
Although he is concerned about the increase, however, Mongellow said the proposal by FHFA also raises red flags about the state’s foreclosure process, which he said takes too long.
With the average foreclosure case in the state taking nearly two years, Mongellow said it is an inefficient process that turns into a costly, drawn-out scenario for banks especially since property taxes and insurance still must be paid.
The banking community has lobbied state lawmakers to put a strict timetable in place for the mediation program so that foreclosure cases don’t continually get drawn out, particularly when there is little to no chance of a borrower being able to afford a home.
“It is a big level of concern for us,” Mongellow said. “The foreclosure process is exceedingly painful for banks. At some point, the process has to go through.”
Mongellow said the CBA isn’t opposed to the mediation program, but they also don’t think it should be permanent. He said it was established to help deal with an onslaught of foreclosure cases in the aftermath of the housing crash. But eventually it should be phased out, he said.
In 2011, state lawmakers modified the mediation program, forbidding lenders from foreclosing on a property for at least eight months and extending the program through July 2014. Mongellow said the CBA will work with state lawmakers this year to try to make changes to the program.
