The Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac’s overseer, wrongly, and egregiously is attacking state consumer protection laws. The Agency published a proposal [http://www.fhfa.gov/webfiles/24525/NoticeStateLevelGfees_to_Fed_RegFINAL.pdf] in September with a comment period that ended this past Monday (Nov. 26th), in which Acting Director Edward DeMarco blames consumer protections for long delays in the foreclosure process in five states: New York, New Jersey, Connecticut, Illinois and Florida. The penalty? A substantial charge to future borrowers in those states. In NY, that fee would be $2,520 on a $200,000 loan.
The proposal is no veiled attack on states’ rights. FHFA boldly claims, "If those states were to adjust their laws and requirements sufficiently to move their foreclosure timelines and costs more in line with the national average, the state-level, risk-based fees imposed under the planned approach would be lowered or eliminated." And a threat to states which may be thinking about implementing consumer protections: “The agency may include the impact of newly-enacted laws if they clearly affect foreclosure timelines or costs, where such costs may be reasonably estimated based on relevant experience.”
Americans for Financial Reform (AFR) submitted a comment in strong opposition to the proposal and has collected at least 16 letters on its website from others including the New York, Connecticut and Illinois Attorneys General, 18 US Senators and House members from NY, a Connecticut congressional delegation, NYS Assemblywomen Helene Weinstein and Annette Robinson, New Yorkers for Responsible Lending (NYRL), the Brennan Center, three professors and more. The letters can be found here. [ http://ourfinancialsecurity.org/letters-arguing-against-fhfa-g-fee-plan/].].
What are the consumer protections at issue? In NY, they include a notice sent 90 days prior to a filing with referrals to reputable non-profit housing counseling agencies in the borrower’s area, mandatory settlement conferences to see if the home can be saved, and a requirement that lawyers affirm that their foreclosure pleadings are accurate. It would be tough to argue that any of these protections are over the top. Actually, they set a pretty basic standard which should exist in all states.
As simple as these requirements are, however, mortgage servicers just can’t comply with them – that is what is causing the long delays. First is their failure to file the required paperwork and attorney affirmation with the court to move the case into the settlement conference process. Thousands of foreclosure cases have been initiated and are just sitting in what has become known as our “shadow docket” with no forward movement, some for upwards of two years.
The delays do not end there. Once a case reaches the settlement conference process, it is the norm for the servicer’s representative to appear without authority to settle the case, or with any real knowledge of the status of the loss mitigation application made by the homeowner. This ill-preparedness, on top of the general failure of servicers to adhere to HAMP (the Home Affordable Modification Program) or other guidelines for making determinations, typically means that 4 to 8 conferences have to be held until a breaking point is reached and the servicer has to make a determination. And even in cases which have moved out of the settlement conference process and are supposed to go forward with litigation, advocates across the state report that the big servicers are not seeking judgments in too many cases.
FHFA misses the boat in their cost calculation of defaults in states with longer timelines, as well. First, there is no consideration for the number of foreclosures. A state with a lower foreclosure rate but a longer time frame, such as NY, is costlier according to FHFA than a state such as Arizona or Nevada which have huge volumes but shorter timelines. More so, though, the equation completely fails to factor in costs saved as a result of consumer protections. There is no question that the settlement conferences in NY mean more people are getting loan modifications and staying in their homes. While estimates vary regarding the “cost” of a foreclosure (I’ve seen estimates from $40,000 to over $100,000), preserving homeownership is generally a cost-saving measure for investors in many respects.
At the very least, FHFA’s imposition of new costs on future borrowers is unfair to prospective borrowers who had nothing to do with driving the reckless lending frenzy of the subprime era, nor the resulting financial crisis. The proposal also will likely slow the already too-slow U.S. housing recovery by increasing the cost of lending in a state like Florida, which, frankly, needs all the help it can get. Not that coastal communities in New York, New Jersey and Connecticut are faring too well lately. If enacted, this proposal would be the proverbial, “kicking someone when they’re down.” The comments collected by AFR urge the FHFA to abandon the proposal.