The Wall Street Journal’s Nick Timiraos reports that Federal Housing Finance Agency Acting Director Edward DeMarco has proposed raising Fannie/Freddie mortgage insurance premiums to cover losses in five states with excruciatingly slow judicial foreclosure processes. Consumer advocates, predictably, are outraged.
New York, New Jersey, Illinois, Connecticut, and Florida — the Deadbeat Five — require court approval before lenders can foreclose on defaulted loans. Given the large court backlogs and procedural obstacles borrowers can raise in these states (including robosigning allegations and required mediations), foreclosures on Fannie/Freddie-insured loans in these states have taken 2-3 years. (There are similar figures for all loans.) Meanwhile, 8% of all Fannie/Freddie-insured Florida mortgages, and 4% of New Jersey mortgages, have made no payments for over a year. When foreclosure is delayed, borrowers live rent-free and typically cut back their maintenance. This increases lender losses, reduces neighborhood property values, and prevents the market from clearing and returning to health. (In contrast, California, with a rapid nonjudicial foreclosure process, has only 1% of loans delinquent more than 12 months.)
In a functioning insurance market, higher risks command higher premiums — FHFA wants $3.50-$7 more per month from borrowers in the Deadbeat Five. But in the US housing market’s version of insurance socialism, consumer advocates, such as a spokeswoman for Illinois Attorney General Lisa Madigan, warn that raising premiums in them would “force states . . . to roll back legal protections for homeowners going through foreclosure.”
Despite the mortgage servicing industry’s sloppy procedures, these mortgages defaulted because borrowers stopped paying their loans. A $1.5 billion audit required by the Office of the Comptroller of the Currency and the Federal Reserve found no meaningful instances of banks wrongfully seizing the homes of borrowers who were current on their payments — notwithstanding that 14 major lenders are soon expected to enter into a $10 billion settlement in order to put foreclosure abuse claims behind them.
Consumer advocates argue that Deadbeat Five borrowers, whose states give them the legal right to remain in their properties for years without paying a dime, are entitled to continued taxpayer-guaranteed mortgage insurance at the same rate as borrowers in states that let lenders foreclose. No wonder Fannie and Freddie went broke. And no wonder the Obama administration reportedly wants to replace Edward DeMarco, with his unsettling habit of defending the taxpayer. The government should exit the mortgage insurance business and let rates reflect market risk.