Higher ‘Guarantee Fees’ Mean Higher Mortgage Rates

The U.S. government plans to help fund the payroll tax cut by raising “guarantee fees” paid by banks to Fannie Mae and Freddie Mac to guarantee mortgage loans. …

The U.S. government plans to help fund the payroll tax cut by raising “guarantee fees” paid by banks to Fannie Mae and Freddie Mac to guarantee mortgage loans. Critics, however, point out that not only are the guarantees worthless (citing the current taxpayer bailout of Fannie and Freddie), but the higher cost will likely be passed on to homebuyers in the form of higher mortgage rates. Major players in the housing industry have joined forces to denounce the plan and business analysts fear the move will drive more business to the already over-extended Federal Housing Administration, but industry experts believe the measure will pass thanks to the popularity of the tax cut. For more on this continue reading the following article from TheStreet.

At face value, it seems like an easy, albeit creative way to pay for the extension of the payroll tax cut. Raise the fees that banks pay mortgage giants Fannie Mae and Freddie Mac to guarantee home loans. These are called "guarantee fees," and are supposed to cover mortgage defaults in a normal housing market. (I say this because obviously in today’s foreclosure-ridden landscape they don’t even come close, which is why the two are currently in debt to U.S. taxpayers for a collective $152.7 billion).

But back to the original premise: Senate Democrats and House Republicans like the idea, which under the Senate proposal would raise $38.1 billion, according to Pennsylvania Senator Bob Casey. Senate and House versions differ on how much the fees would be raised, but both proposals are additions of less than 1% of the loan.

"This is one of those ideas that manages to attract support from the left and the right because on the right they love the idea of raising the cost of using Fannie and Freddie, because that could bring the private sector back to the mortgage market. On the left, it’s seen as a very convenient and not very painful way to extend a tax cut that millions of consumers enjoy," notes Jaret Seiberg of Guggenheim Partners.

But make no mistake, the banks will pass this increased fee on to borrowers in the form of higher interest rates on mortgages. In essence, it’s a conduit for the home buyer to pay the bank to pay Fannie and Freddie to pay the Treasury to pay for the tax credit. Only in Washington…

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The housing industry hates it, and so the Mortgage Bankers, National Association of Realtors and National Association of Home Builders penned a coalition letter to Speaker of the House, John Boehner:

"We strongly believe that fees charged by the Enterprises [Fannie/Freddie] to manage risk and enhance capital should not be diverted for purposes unrelated to the safety and soundness of the housing finance system."

Frankly, they’re worried that this is a surtax on housing and, even worse, a slippery slope.

"The danger is that we are establishing a precedent that we are going to tax the home purchase transaction to fund things that have nothing to do with housing, and if that takes off, any time government needs money this will be an easy place to turn," adds Seiberg.

Seiberg doesn’t believe the higher fees would make potential home buyers turn away from getting a Fannie or Freddie mortgage, and/or push them to the already bloated Federal Housing Administration (FHA). The FHA charges higher insurance premiums, but others believe that it could have that effect.

"With no appetite for private investment in mortgages, this action will simply drive more business to FHA, at a time when everyone agrees that the FHA should be shrinking its market share, not increasing it," wrote MBA President and CEO David Stevens in a statement today.

The measure did not pass a vote last week but is expected to survive this week, as it will be attached to a "continuing resolution" to keep funding the government. The industry will likely lose this one because the tax break is simply far more politically popular than the fear of future meddling in mortgages.

This article was republished with permission from TheStreet.


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