December 9, 2011
As 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.
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 percentage points, to 6.2 percent from a rate of 4.2 percent – 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. 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 percentage 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-Calif. “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.”
The GSEs 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.”
Other real estate experts worry that the new fees could undercut a housing market that is still struggling to recover from a prolonged bust. Long-term mortgage rates are hovering near historic lows, but demand remains weak. Imposing higher fees could further weaken it, says Greg McBride, senior financial analyst Bankrate.com – particularly as lenders would likely pass the higher fees on to would-be homebuyers or those looking to refinance. “The decision to refinance starts with the calculation of how much you will save, how much you will pay in fees and how long it will take for the savings to offset the fees you paid,” McBride said. “Suddenly that time table gets longer if the fees are higher and it won’t generate enough savings to warrant the refinance.”
Cris DeRitis, director of consumer credit analytics at Moody’s Analytics, says the increased fees would probably amount to an additional $10 to $20 payment each month on a $200,000 house. “It’s not insurmountable, but it’s an added cost and households are already being stretched,” he says. “It won’t collapse the housing market, but it wouldn’t move it forward or send a positive message to homeowners.”