Backtracking U.S. Lawmakers Expand Federal Role in Mortgages
Washington lawmakers, who began 2011 with sweeping plans to shrink the U.S. government’s role in mortgage finance, are heading into 2012 after enacting policies that expand it.
An 11th-hour payroll tax cut extension signed into law last week will for the first time divert funds directly from Fannie Mae (FNMA) and Freddie Mac, the two mortgage-finance companies under U.S. conservatorship, to pay for general government expenses.
That move came after two others that also could increase government involvement: Lawmakers allowed a tax break on private mortgage insurance to expire and raised loan limits for mortgages insured by the Federal Housing Administration. Advocates of private mortgage finance say they are concerned that using fees from Fannie Mae and Freddie Mac is setting a precedent that will keep the government in the mortgage business for a decade or more.
“The goal was, at the beginning of the year, how do we wind these down?” said Edward Pinto, a resident fellow at the American Enterprise Institute, a Washington-based research organization that favors limited government. “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.”
The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac (FMCC), today directed the companies to increase fees on new mortgages by an average of 10 basis points, or .1 percentage point, effective April 1, to comply with the law.
10 Basis Points
“The average guarantee fees charged in 2012 need to be at least 10 basis points greater than the average guarantee fees charged in 2011,” with the additional revenue remitted to the U.S. Treasury Department, FHFA Acting Director Edward J. DeMarco said in a written statement.
Fannie Mae, Freddie Mac and the FHA currently back more than 90 percent of loan originations, about double what they did during the subprime lending boom, according to Inside Mortgage Finance, a trade publication.
Earlier in the year, the Obama administration and members of Congress outlined plans to reverse that trend. In February, U.S. Treasury Secretary Timothy F. Geithner released three options for reducing government’s role in housing finance. Shortly afterward, Republicans introduced bills to wind down Fannie Mae and Freddie Mac, which have cost taxpayers about $153 billion since 2008 because of defaults on loans they guaranteed. The legislation never advanced because there was no agreement even within the Republican caucus on the best way to proceed.
In December, in a search to find about $36 billion to finance a two-month payroll tax cut, Congress ordered a decade- long increase in the premiums that Fannie Mae and Freddie Mac charge lenders to guarantee principal and interest on home loans. Lenders typically pass on the cost of the premiums, known as guarantee fees or g fees, to borrowers as higher interest rates.
The move is drawing criticism: It relies on long-term revenues from entities that Democrats and Republicans want to shrink, and the money won’t be spent to offset the risk of loan defaults.
“In effect, this is a tax on Fannie and Freddie mortgages,” said Bert Ely, a banking consultant in Alexandria, Virginia. “When you go to privatize or take any action to wind them down, you have a budget effect that you didn’t have before.”
“It seems to be an inherent contradiction counting on revenue from a 10-year increase in guarantee fees from agencies that might not be around in 10 years,” said Joe Pigg, vice president of mortgage finance at the American Bankers Association, an industry trade group in Washington.
Housing analysts say they are concerned that lawmakers will now start looking to the government-sponsored enterprises as sources of funds for purposes unrelated to housing.
“Using the g fees as a funding source for general revenues sets a bad precedent for how you’re going to raise revenues,” said Ethan Handelman, vice president for policy and advocacy at the National Housing Conference, which advocates for government policies that support affordable housing.
The controversy over g fees comes on top of other policy changes that housing analysts say could keep the government entrenched in the mortgage market.
In November, House and Senate lawmakers increased the maximum size of FHA-insured loans to $729,750 from $625,500, a move opposed by Republican leaders including Representative Jeb Hensarling of Texas.
Insurance Tax Break
Congress also failed to extend a tax break on private mortgage insurance for low-downpayment borrowers that expires Dec. 31. Private mortgage insurers indemnify lenders against loan defaults, with the cost of premiums passed to homeowners. Eliminating the tax deduction raises the cost of private insurance and makes FHA insurance a more attractive alternative.
Congress’s rush to solve fiscal problems at the end of the year allows decisions to be made without going through the normal deliberative channels that might have produced outcomes more in line with the goal of reducing the government footprint in housing, Pinto said.
“You have these policies being made that aren’t really going through the regular order, and they’re not being discussed and hearings held and testimony taken,” he said. “They’re just being done as an expedient.”
Fannie Mae and Freddie Mac are also implementing plans of their own to raise guarantee fees even higher. DeMarco said the companies would gradually increase their rates as a way to reduce losses at the companies and limit their cost to taxpayers.
Those fee increases, which have already begun, are intended to better reflect the degree of risk that the GSEs are assuming when they guarantee mortgages, DeMarco said.