Bills offered by Democrats and Republicans to extend an expiring payroll tax cut would, for the first time, divert fees charged by Fannie Mae and Freddie Mac to the U.S. Treasury instead of using them to backstop defaulted loans.
Legislation written by Democrats in the Senate and Republicans in the House would raise as much as $38 billion over 10 years to offset the tax cut by increasing the rates that the two government-controlled mortgage companies charge lenders to guarantee principal and interest on home loans. Until now, all of the revenues from those guarantee fees have gone to Fannie Mae and Freddie Mac to cover mortgage defaults.
As Congress struggles to reach agreement on the payroll tax cut before the end of the year, some lawmakers, mortgage industry trade groups, and even the companies’ regulator are raising concerns about the revenue plan. They question whether it is appropriate to siphon funds from Fannie Mae and Freddie Mac to feed general government accounts at a time when members of both parties are pushing to reduce the government’s role in the two companies, known as government-sponsored enterprises.
“Relying on long-term revenue from the enterprises as an offset for short-term tax cuts seems inconsistent with the need to end the conservatorships and reform our housing finance system,” Edward DeMarco, acting director of the Federal Housing Finance Agency, said in an e-mailed statement. “FHFA will implement whatever Congress directs but I hope final resolution of the conservatorships occurs much sooner than 10 years from now.”
Fannie Mae and Freddie Mac buy mortgages and package them into securities with guaranteed payments of principal and interest. To guard against losses in case of default, they charge lenders premiums commonly known as “g fees.” Lenders typically add the fees, which average about 27 basis points, to a home loan’s interest rate.
The House and Senate bills would add an additional 10 basis points onto the guarantee fees.
The increases, if lenders pass them along to homebuyers, would cost a borrower with a $200,000 mortgage about $4,000 over the life of the loan, according to the Mortgage Bankers Association.
Critics of the proposals say they would cause a drag on the housing market. Furthermore, they say, fee increases are misguided at a time when the two companies have drawn $170 billion in aid from the U.S. Treasury to stay afloat.
“My concern is that this is just slipping by most of America with little awareness as to the real impact,” David Stevens, president of the Mortgage Bankers Association, said in an interview. “To divert these fees as though they were a piggy bank for arbitrary tax policy that has no relationship to the risks of these institutions is disgraceful.”
The concept of using guarantee fees to help solve federal budget problems arose from the negotiations of the congressional supercommittee that was charged with forging a bipartisan deficit-reduction plan this year. Though the supercommittee said in November that it could not complete its task, the fee increase received bipartisan support.
“Raising g fees will help the private market compete on a level playing field, reduce Fannie Mae’s and Freddie Mac’s market share over time, and limit taxpayer exposure from the GSE conservatorships,” a group of House Republicans wrote in a letter to the panel.
FHFA’s DeMarco has previously said he that he agrees that the guarantee fees need to be raised to better reflect lending risk. He said at a Dec. 1 congressional hearing that Fannie Mae and Freddie Mac would increase their rates gradually throughout 2012. The government-owned mortgage companies’ pricing for credit guarantees “is less than one would observe in a purely private, competitive market,” he said during a speech in September.
Massachusetts Democrat Barney Frank, the ranking Democrat on the House Financial Services Committee, said he does not like the idea of using guarantee fees to pay for a tax cut, but for different reasons. He has other plans for the money, he said.
“I think it is legitimate to take some percentage of that to fund affordable rental housing,” he said in an interview. “If you keep it in the housing area, you’re not hurting the housing piece of the economy.”