Would-be home buyers recently averted a major price hike by the narrowest of margins. No, this potential hike had little to do with the wholesale cost of building materials, the cost of borrowing capital, a scarcity of inventory, or the transaction costs of builders, Realtors or lenders. Rather, the latest proposed tax on new homeowners was designed to cover the cost of maintaining our nation’s bridges and roads.
Wait a second — what, if anything, does highway spending have to do with the cost of a residential mortgage? If you guessed “absolutely nothing at all” you’d be correct. Unless, of course, you happen to be a member of the 114th Congress. In that case, America’s newest class of would-be homeowners represents something similar to years past when homeowners were taxed to cover things like the payroll tax reduction extension.
In the Washington of today — similar to past occasions, the American homeowner is all-too-often referred to as a “pay for.”
In this case, various members of Congress sought an offset for a proposed $47 billion federal highway spending bill.
As crazy as it sounds, the latest unsuccessful home ownership “pay-for” proposal isn’t the first time such a plan has been considered. In fact, if you bought a home after December 2011 with a mortgage purchased by Fannie Mae and Freddie Mac, you’re already paying for much more than the cost of a place to live.
The Temporary Payroll Tax Cut Continuation Act of 2011 — H.R. 3765 of the 112th Congress charged new homeowners an additional 10 basis points in guarantee fee costs over the life of a 30-year mortgage. The proceeds were intended to help cover an increase in a two-month extension of the payroll tax credit and also unemployment compensation payments to long-term unemployed workers for roughly two months, from mid-December 2011 until February 29, 2012.
The law states that loan guarantee fees at Fannie and Freddie will rise “by not less than an average increase of 10 basis points for each origination year or book year above the average fees imposed in 2011 for such guarantees.” This means that an estimated $36 billion in additional fees collected over 10 years will be used to offset $33 billion in up-front costs tallied by a mere eight weeks of payroll tax deductions and unemployment insurance.
Of course none of this has anything to do with the financial health of Fannie Mae and Freddie Mac or the creditworthiness of the individual borrower, but it directly impacts the cost of a new home purchase or refinance. It happened because there’s value in home ownership — value that some congressional leaders think can be taxed for almost anything.
The recent flurry of loan guarantee fee increases at Fannie Mae and Freddie Mac (three times in just over four years) has nothing to do with the risk expected within the overall portfolios of loan business purchased by either of the two mortgage guarantor giants Fannie Mae or Freddie Mac during this time frame. The overall creditworthiness of loan portfolios purchased by both Fannie Mae and Freddie Mac has risen significantly over the last six years. In fact, both GSEs carry loan portfolios with aggregate average FICO scores well in excess of the average American. Yet, loan guarantee fees at Fannie Mae and Freddie Mac have skyrocketed by more than 160 percent over the exact same time period.
One reason for the recent rise in “g-fee” expenses has to do with congressional spending packages brokered by both parties for all sorts of concerns. Add to this equation the simple fact that the GSEs themselves are essentially a government-controlled duopoly, and one can understand exactly how the last six years of guarantee fee hikes came to pass.
Fannie Mae and Freddie Mac both currently operate under federal conservatorship administered by the Federal Housing Finance Agency (FHFA). Now in its 84th consecutive month, this “temporary” conservatorship has continued for almost seven years with no proposed plan for a future model. Freddie Mac declared over $8 billion in profits in 2014 alone. Fannie Mae recently declared profits of $4.6 billion in the brief April-through-June time period of 2Q 2015 by itself. Meanwhile, home buyers, cities, communities and the lenders and real estate agents that support the home ownership market have continued to struggle to recover from the housing financial crisis.
Keep in mind, the true cost of capital for Fannie Mae and Freddie Mac alike, is essentially zero — they are “conservatees” of the federal government. The notion of passing the cost of capital to the consumer, much like a private sector bank would, simply does not apply in the same sense.
The damage that a deliberate yet unwarranted campaign of GSE guarantee fee has done to American home ownership is clear. With wrongheaded policies such as these, it is easy to understand how the U.S. home ownership rate has dropped to the lowest level in almost 50 years.
It bears mentioning that not everyone on Capitol Hill is interested in using your nest egg as their fiscal piggy bank. Various members of Congress from both political parties have stood in unison to say “enough.” Republican Senator Bob Corker of Tennessee recently joined Democratic Senator Mark Warner of Virginia in authoring an open letter to Senate Majority Leader Mitch McConnell (R) and Senate Minority Leader Harry Reid (D) in opposition to the “homes for highways” pay-for gambit.
“Each time guarantee fees are extended, increased or diverted for unrelated spending, homeowners are charged more for their mortgages and taxpayers are exposed to additional risk,” said Senators Corker and Warner. Exactly.
It took a (rare) bipartisan effort led by Senators Corker and Warner to publicly shame Congress into upholding the same measure prohibiting such g-fee “pay-for” deals that they themselves passed only months ago.
It has happened before, and it will undoubtedly happen again. It’s just too easy, and it makes almost everyone happy. Everyone except the unsuspecting homeowner, that is. Various constituent groups get whatever spending item they’re after today, fiscal watchdogs get the satisfaction of knowing that at least someone, somewhere, is on the hook to pay the added cost. The problem is, if you’re in the market to buy a home in the foreseeable future or planning to refinance your existing home loan, that “someone” will most likely be you.
Prospective new homeowners have all sorts of pressing concerns to consider. Strapping the cost of a federal highway spending bill onto their backs by way of artificially inflated loan guarantee fees paid over the life of a 30-year mortgage shouldn’t be one of them.