How Slower Foreclosures Cause More Expensive Mortgages


Home buyers who live in judicial states like Florida and Illinois are going to end up paying more for their mortgages because foreclosures in their states take longer to process.

Come again?

You heard right.  That’s the bottom line of new fees recently proposed by the Federal Housing and Finance Administration.  In a brilliant analysis, “Easing Distress on the Horizon,” John Burns’ Senior Research Analyst Adam Artunian exposed the twisted logic that only someone working for the Treasury Department could dream up.

“It is clear that the judicial foreclosure process has interfered with the housing recovery. Designed to protect homeowners, it has done the opposite (unless you consider allowing people to live for free a good thing). Now, those who live in judicial foreclosure states are going to pay more for their mortgages than those who do not,” Artunian writes.

Because judicial states’ foreclosure procedures result in higher foreclosure costs and delays than other states, the FHFA, which oversees Fannie Mae and Freddie Mac, announced in September additional fees on loans made in judicial foreclosure states.

  • Mortgages would have a new, upfront fee of 15 to 30 bps.

  • That fee would be charged to lenders as a one-time fee, paid up front, for every loan Fannie or Freddie acquires.
  • It’s estimated that for a borrower with a 30-year FRM of $200,000, the monthly mortgage payment will increase by $3.50 to $7.

The FHFA has selected Connecticut, Florida, Illinois, New Jersey, and New York (all judicial states) for the new fees. The fees would be charged to lenders as a one-time upfront fee for every loan Fannie or Freddie acquires.  FHFA said that the wide variations among states in the costs the GSEs incur from mortgage defaults are attributable to three factors:

  • The length of time needed to secure marketable title to the property;
  • Property taxes that must be paid until marketable title is secured, and
  • Legal and operational expenses during that period.

Twenty one states have costs above the national average and several have costs above those in the five targeted states, however it appears to be the time frame that is driving the disparity.

So guess who pays these fees?  Not the states that are causing the delay not the politicians that passed the laws.  Nor the lenders who collect them.  They’ll pass them along to homebuyers who may not have a clue what’s going until they get to the closing table where the joke is on them.  Of course, they will be grateful to learn the good news is that the fees can be rolled into their mortgage and cost them only a few bucks each month.  They won’t even notice that they are paying the excessive carrying costs for someone else’s foreclosure, costs resulting from ill-conceived laws that have extended the pain of the Foreclosure Era for homeowners in the 23 judicial states.  In fact, if they buy within the next three years, they will experience some of that pain themselves as they wonder why their home isn’t appreciating as quickly as their friends and family members in non-judicial states.

Photo: Wonderlane

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


  1. Andy Teasley on


    I have to throw the jargon penalty flag on your article! Believe it or not there are readers of Bigger Pockets who haven’t been in real estate for very long or who haven’t been in government. Please explain terms and acronyms at least once in EACH article you use and make it easy for the newbies.

    By the way, I was giving a presentation on creative finance years back and a guy in the back actually throw a yellow flag when I used the term “Starker Exchange” (that’s a 1031 exchange for the newbies) after the meeting he chewed my tail about a few terms that he and I both understood but many of the group didn’t.

    Andy Teasley

    • Andy,

      I plead guilty and I’ll try to do better in the future!

      To clear things up, here are definitions for my worst sins.

      Federal Housing and Finance Administration (FHFA). This is an agency within the Treasury Department that has run Fannie Mae and Freddie Mac since they were taken over by the government in September 2009.

      Judicial foreclosure states. In these 23 states, a court order is required to foreclose on a home. This fact alone delays the foreclosure process, however during the 18-period in 2010 and 2011 following the surfacing of the Robogate scandal, mortgage servicers slowed processing in these states more than others because of the increased risk of making an error. As a result, large backlogs of foreclosures piled up, which are still being worked through. In general, judicial states are located in the Midwest and Northeast. A notable exception is Florida.

      FRM. Fixed rate mortgage.

      Bps. Basis points. One basis point is equal to 1/100th of 1% and is used to measure changes in interest rates.

      GSEs. Government-sponsored enterprises. Fannie Mae and Freddie Mac are GSEs.
      Foreclosure Era. A term I like to use to describe the period beginning in 2007 when the subprime mortgage crash and the housing crash created unprecedented numbers of defaults and foreclosures, and spawned the REO-to-rental business where investors are buying foreclosures, fixing them up an renting them out. As defaults are declining steadily and foreclosure inventories declining, we are clearly in the final years of the Foreclosure Era.

      Thanks for you comment.


  2. Landlords (good ones) always calculate their cost of eviction into what they have to charge for rent to break even, so why shouldn’t lenders calculate the cost of foreclosure into what they have to charge for loans (or mortgage insurance)? I do not see anything twisted about that logic- in fact, it is one of the few decisions made by the FHFA in response to the financial crisis that makes sense.

  3. Great post with spot on analysis. Do gooders think they’re helping home owner’s, but they’re only ‘helping’ louts who aren’t making their payments. Once someone’s behind 4 months, they’re almost never going to be able to get current again. Prolonging the agony isn’t helping anyone and everyone else pays the price.

    • The “Do Gooders” would claim that the reason for a judicial process is to prevent bad players (lenders) from foreclosing illegally. For example, a homeowner who is paying their mortgage gets foreclosed on because a bank gets acquired by another bank and they lose or mess up the paperwork in the transfer.

      I realize such situations are rare… but there are many ways a lender could fail in there legal and ethical obligations when foreclosing. Obviously, in the current climate, a lender is most likely to do whatever they can to avoid foreclosure if a reasonable alternative is available- but in a different climate, there may be significant financial gain to be had by breaking the rules to foreclose.

      Personally, I am in favor of having a clear, sensible, streamlined, and efficient legal process… unfortunately, that is not the nature of the beast.

  4. Another Great Article Steve.

    Nice to see somebody out there has some common sense and knows how to reason when it comes to the foreclosure fiasco.

    Five years ago we thought this would all be over by now and here we still are due to people not understanding what needs to be done after a “bubble” pops.

    More programs, more programs, more programs…. all have a cost to somebody.

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