Americans had better enjoy the extra $40 they'll continue to get in their biweekly paychecks for the next two months, because most of them will be paying for it many times over in the form of higher mortgage costs.
Lost in the contentious debate over the payroll tax cut extension - a 2% cut in U.S. workers' Social Security tax - was the devious way Congress devised to pay for it.
The law that Congress passed - and U.S. President Barack Obama signed - included a provision that will increase a guarantee fee that finance companies Fannie Mae and Freddie Mac charge to mortgage loan originators - a fee that will get passed on to borrowers as a slightly higher interest rate.
"We understand the desire by Congress to extend the payroll tax [cut] because so many Americans are hurting right now," David Stevens, president of the Mortgage Bankers Association, told the Los Angeles Times. "But the cost of that is going to be directly paid for by a whole other set of Americans who use Fannie Mae and Freddie Mac for their mortgages."
The 0.1% increase doesn't sound like much - it would add $11 a month to the payment on a $200,000 loan and $18 a month to a $300,000 loan. But it adds up over the life of a 30-year mortgage.
A $200,000 loan would end up costing $3,863 more, while a $300,000 loan would cost $6,246 more. That's quite a premium to pay for an average payroll tax cut benefit of less than $200, and most people will never even know they're paying it.
The hidden tax, which goes into effect April 12, will affect most people buying or refinancing a home, as Fannie Mae and Freddie Mac account for about 60% of the U.S. mortgage market. It is scheduled to last 10 years in order to produce the $37.5 billion needed to cover the payroll tax cut extension and an extension of unemployment benefits for up to 99 weeks.
Now Congress Is Stuck
By creating a decade-long dependence on the fee, Congress has made it far tougher to untangle the government from Fannie and Freddie, which bear much of the blame for the subprime mortgage crisis that triggered the financial meltdown in 2008.
That's when the federal government took control of both Fannie and Freddie to avert a failure due to billions of dollars in loan defaults. With the ensuing bailout having cost American taxpayers $153 billion, you'd think Fannie and Freddie would have few friends.
"The goal was, at the beginning of the year, how do we wind these down?" Edward Pinto, a resident fellow at the American Enterprise Institute, told Bloomberg News. "And at the end of the year we have further entrenched them and made it more difficult to wind them down, which is classic Washington."
Indeed, several proposals from both President Obama and Congress that would have started the process of getting the federal government out of the mortgage business faded away as the year went on.
"They're both insolvent wards of the government," said Money Morning Capital Waves Strategist Shah Gilani. "They have to be phased out eventually."
But now that Congress has seized upon Fannie and Freddie as a source of revenue, they could be with us for many, many years to come.
"It's the precedent here that is troubling," Anthony Sanders, a professor of real-estate finance at George Mason University, told The Wall Street Journal. "This isn't going to help Fannie and Freddie pay back what they owe and almost adds a permanency to Fannie and Freddie as a slush fund for Congress and the administration."
Making More Trouble
In addition, the diversion of the new money into the U.S. Treasury defeats the purpose of the existing loan guarantee fee, which is to compensate Freddie and Fannie for loan risk as well as cover their overhead. After the debacle of 2008, it hardly makes sense to send money intended to prevent such disasters elsewhere.
Finally, the new tax won't do the struggling housing market any favors by raising the cost of borrowing.
"Housing doesn't need any more speed bumps, and this is a speed bump," Jaret Seiberg, senior financial policy analyst at Guggenheim Partners told the Los Angeles Times. "It's not a big one, but every extra penny that it costs to finance a home puts that much more downward pressure on home prices."
No wonder America hates Congress.
"It's a stupid, stupid idea,"Ken Rosen, chairman of the Fisher Center for Real Estate at UC Berkeley, told the San Francisco Chronicle. "[Guarantee fees] should be actuarially determined, not a function of fiscal policy. Making it harder and more expensive to get a mortgage at this time is insane. [Housing] is far more important to the economy than a payroll tax cut."
News and Related Story Links:
- Money Morning:
Mortgages for the 'Middle-Rich' Are Class Warfare Ammunition - Money Morning:
How to Fix the U.S. Housing Market - Money Morning:
Mortgages for the 'Middle-Rich' Are Class Warfare Ammunition - Money Morning:
Don't Expect to See a Housing Market Rebound Anytime Soon - Money Morning:
The Five Most Idiotic Things Congress Did This Week - The Housing Wire:
Fannie, Freddie to raise g-fees in April - The Huffington Post:
The Payroll Tax Cut Extension: How It Affects The Average American - Bloomberg News:
Congress Passes Payroll Tax-Cut Extension
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.