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13 Dec 11 Increasing Mortgage Fees to Fund the Payroll Tax Cut

Wow, it seems politicians will go to great lengths for Obama’s reelection campaign as they are now moving to fund the payroll tax cuts by taxing future government mortgages. It’s hard to believe that with the social security well running dry that we would slash the payroll taxes that actually fund it, but then to hear that they are going to use mortgages bought by Fannie Mae and Freddie Mac to fund it is even more absurd.

Democrats and Republicans continue to wrangle over how to pay for extending the payroll tax cut, one option floated by both parties on Capitol Hill is to tap into mortgage giants Fannie Mae and Freddie Mac to raise $38 billion in revenue over 10 years. But the proposal, which would require that the two Government Sponsored Enterprises (GSEs) undergirding the housing market raise the fees they collect from lenders, has real estate industry groups in an uproar. And housing experts say the additional fees could be yet another headwind for the shaky housing market.

Many lenders are advertising low rates and fees on government loans so we suggest comparing mortgage-refinance rates and terms from multiple lending sources.

The idea of boosting the fees Fannie Mae and Freddie Mac collect was first floated by the now defunct congressional Super Committee tasked with finding $1.2 trillion in deficit-reduction measures, and it had garnered bipartisan support at the time. Now, as Congress looks for ways to pay for an extension of the payroll tax cut, the proposal has resurfaced in legislation put forth by both House Republicans and Senate Democrats. If Congress doesn’t act the payroll tax cut is scheduled to increase by two %age points, to 6.2% from a rate of 4.2% – which would effectively increase taxes by $1,000 for the average family next year.

Fannie Mae and Freddie Mac don’t issue mortgages themselves, but they buy them from lenders and repackage them into securities that are then sold to a wide range of investors. The two GSEs now own or guarantee about half of U.S. home mortgages, or nearly 31 million loans. To protect against any defaults, they charge the originating lenders “guarantee” fees. Last year, those fees averaged 0.26 percentage points of a loan’s value. Under the new Republican and Democratic proposals, the fees would rise by at least an eighth of a %age point – and the money raised would go to the Treasury Department, not to Fannie and Freddie.

Business groups are opposed both to the higher fees and to the idea of diverting the money to the Treasury. The National Association of Realtors and the National Home Builders Association on Thursday sent a letter to Sen. Bob Casey, D-Penn., author of the Democratic proposal, arguing that the fees “should not be diverted for purposes unrelated to the safety and soundness of the housing finance system.” The groups said the congressional proposal is “counterproductive” and said the fees should be used “solely for the purpose of minimizing the loss exposure of these government-sponsored enterprises, investors and taxpayers.” The National Association of Realtors will send another letter to the House GOP leadership on Friday stating its fierce opposition to using revenue from a fee increase to fund programs outside of housing.

Some in Congress are also adamantly opposed to the higher fees. “Fannie Mae and Freddie Mac are currently being propped up by taxpayer dollars, so it makes no sense to use them as an ATM to pay for other government spending,” says Rep. Dennis Cardoza, D-California. “Although I support extending the payroll tax cut, it is imperative we find another source of funding instead of playing these shell games. Fannie and Freddie are already floundering under the weight of the ongoing housing crisis and I fear this could only further worsen their ability to help struggling homeowners.” Home refinance lenders continue to express concerns over increased mortgage insurance premiums so this could really burden borrowers in the Golden state.

The Government Sponsored Enterprises are still burdened with financial problems of their own. Since the Bush administration seized control of the mortgage giants in September 2008, they have received $151 billion in taxpayer funding – money that they must still repay. Having the guarantee fee go to the Treasury instead of Fannie and Freddie would only make it harder for them to pay down their debts, says Susan Wachter, professor of financial management at the University of Pennsylvania’s Wharton School. “If it is raised and goes to pay for Treasury deficits, it’s not covering the deficit that Fannie and Freddie owe, which ultimately is a tax payer liability as well,” she says. “It’s not accomplishing what it’s supposed to accomplish.”

Read the original Fiscal Times Articles on Paying for the Payroll Tax Cut.

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