Housing Regulator To Punish Homeowners In States That Make It Harder To Foreclose

The Federal Housing Finance Agency (FHFA) has proposed raising the prices of federally-insured mortgages in states that have attempted to make it harder for banks to foreclose on homeowners. Under the proposal, lenders in five states will have to pay more to originate mortgages backed by Fannie Mae and Freddie Mac, and the costs will likely be passed on to borrowers, the Financial Times reports:

Lenders originating new loans in New York, New Jersey, Illinois, Florida and Connecticut will be forced to pay US-backed mortgage giants Fannie Mae and Freddie Mac up to 30 basis points extra for their credit guarantee, the Federal Housing Finance Agency said in its proposal.

The fee would probably be passed on to borrowers. The agency said the surcharge would compensate for the increased cost of repossessing homes in the five states, costs ultimately borne by US taxpayers.

The FHFA argues that the policy is necessary to keep homeowners in other states from subsidizing homeowners in those five, as cost discrepancies occur when the foreclosure process is slowed down.

The decision, though, ignores why those five states slowed down the foreclosure process. Speedy foreclosure processes make it easier for lenders to use robo-signers that lead to fraudulent documentation, to the dual-tracking practice that caused foreclosures on homeowners actively seeking loan modifications, or to lenders making mistakes and foreclosing on the wrong homes.

Slowing down the process makes it easier to prevent fraud, catch those mistakes, and hold banks and lenders accountable. But thanks to the new FHFA policy, the incentive will again be to make the foreclosure process as fast as possible, as FireDogLake’s David Dayen explained.

“So the federal conservator of Fannie and Freddie wants to put its thumbs on the scale in favor of faster foreclosures and diminished due process,” Dayen wrote. “FHFA wants to be able to foreclose on lenders…without concern for whether the documents are legitimate, without concern for whether the bank and the borrower can come to a resolution on a modification.”