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FHFA Slammed for Penalizing States That Protect Borrowers

NEW YORK (TheStreet) - Housing and consumer advocates are urging the Federal Housing Finance Agency to abandon its proposal to raise guarantee fees in states that the agency views as having excessively high foreclosure costs.

The regulator of Fannie Mae (FNMA) and Freddie Mac (FNMA) proposes to raise fees for guaranteeing debt by 15 to 30 basis points in the states of Connecticut, Florida, Illinois, New Jersey and New York, all of which follow a judicial foreclosure process, where the bank has to prove in court that the mortgagor is in default in order to foreclose.

The procedure is lengthy, with the time to complete a foreclosure averaging 1072 days in New York in the third quarter and 858 days in Florida.

The FHFA believes that the carrying costs investors incur during the period a defaulted loan is non-performing is significantly higher in these states and therefore the GSEs need to be compensated accordingly.

But the increase in fees would likely lead to higher mortgage rates in these states. New York for instance will be charged an upfront fee of 30 basis points, which amounts to $2,250 on a $200,000 mortgage.

The proposal says it would reverse the fee should states choose to "adjust their laws and requirements" to move foreclosure timelines more towards the national average.

Critics say the law unfairly punishes borrowers for what essentially is the failure of servicers to follow required laws and procedures.

Earlier this week, attorneys general from Connecticut, Illinois and New York wrote a letter to FHFA acting director Edward DeMarco calling the move "profoundly anti-homeowner".

"We find it troubling that the agency would try to leverage its pricing power to influence the legislative processes in our states and others, to the detriment of homeowners," they wrote. "The proposal amounts to a thinly disguised threat, placing the affected states in the untenable position of choosing between higher borrowing costs for their residents or dismantling homeowners' legal protections."

Consumer groups in New York, which faces the highest charge under the proposal, have also expressed their opposition to the move.

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