Reading between the lines: Who's paying for the payroll tax cut extension?
...if you're buying or refinancing a home, there's a good chance you are.
On Dec. 23rd, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 2011 with great fanfare. The law extends the payroll tax holiday that we enjoyed in 2011 for two months (or through Feb. 29).
In order to pay for the extension, the law directs the Federal Housing Finance Agency (FHFA) to increase guarantee fees charged by Fannie Mae and Freddie Mac by no less than 10 basis points (one-tenth of a percent), effective immediately. Lenders pay the guarantee fee when they sell a mortgage to Fannie or Freddie primarily to cover the risk that the loan might default. (It's kind of like insurance.)
Unfortunately for borrowers, lenders are not going to suck up the fee; rather, they will pass it along to borrowers as an additional closing cost, a borrower's tax. And due to the mechanics of mortgage pricing, a 10 basis point increase in the guarantee fee equates to roughly $800 in added closing costs on a $200,000 mortgage.
Most borrowers won't see the fee on their loan closing statements. Instead, they will pay it through higher interest rates. Interest rates already have moved up by roughly .125%. (You may not have noticed because rates have been at record lows of late.) On our $200,000 mortgage, this means the monthly payment is $14 higher. Over the life of a 30-year mortgage, that's an extra $5000 in interest.
The law mandates that the higher fees remain in effect for the next 10 years, meaning borrowers who take out a mortgage through 2021 will pay higher interest rates. And this is to support a two month extension of the tax holiday.
The increased fees affect only conventional mortgages sold to Fannie and Freddie, which is the majority of mortgages at this time. While the fess do not affect mortgages guaranteed by FHA, VA and USDA, the law also increases the annual mortgage insurance premium for FHA borrowers by one-tenth of a percent. On a $200,000 FHA mortgage, this increases the monthly payment by $16.
Higher interest rates and fees mean fewer people qualify for a loan. Experts agree that weakness in the housing industry is delaying our economic recovery. Need I point out the absurdity of adding a tax on borrowers that will slow housing further? (I'd say what were they thinking, but that would imply thought.)
It wasn't long ago that Washington promised to shut down Fannie and Freddie after they gobbled up all that bailout money. The borrower's tax lasts for 10 years. How will Washington reconcile this 10-year tax with that promise? Further, why are politicians treating a fee intended to protect against defaulting mortgages as a slush fund for goodies intended to get them reelected? Seems a bit irresponsible to me.