Just when you thought you heard enough of Fannie Mae and Freddie Mac in the finance home news, the government sponsored enterprises make headlines again. Congress and the Obama administration are turning to an unlikely source to pay for the proposed extension of the payroll-tax cut: mortgage-finance giants Fannie Mae and Freddie Mac. The revenue source proposed by both Senate Democrats and House Republicans would boost fees that Fannie and Freddie collect from lenders. But that is raising hackles in the real-estate industry. Builders, Realtors and lenders say it would amount to a tax that would be passed on to mortgage borrowers.
Fannie Mae and Freddie Mac do not originate home loans, but instead buy them from mortgage lenders. They bundle those loans into securities that are sold to investors, and promise to make investors whole if the loans default. To cover any defaults, Fannie and Freddie charge “guarantee” fees to lenders when they buy the home loans.
Lenders pass the home loan-guarantee fees on to borrowers in the form of higher rates. Last year, those fees averaged around one-quarter of one percent of the home loan amount. The Senate proposal directs Fannie and Freddie’s regulator to raise those fees by at least one-eighth of one percent over the next two years. The House proposal calls for an increase of one-tenth of one percent over the same period.
The proposal also would change who receives the fees. Instead of allowing those additional funds to flow to Fannie and Freddie, the plan would send them straight to the Treasury Department, which effectively owns the companies.
The provision wouldn’t have a significant effect on mortgage demand because home loan interest rates are at their lowest levels in decades, said Guy Cecala, publisher of Inside Mortgage Finance. Still, he added, “All you’re doing is putting another tax on the homeowner.”
The proposal is the latest example of how the open-ended federal stewardship of Fannie and Freddie is moving in new and unforeseen directions. The companies were taken over three years ago, and Congress and the White House have made no progress figuring out how to revamp them. “It’s the precedent here that is troubling,” said Anthony Sanders, a professor of real-estate finance at George Mason University in Fairfax, Va. “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.”
An Obama administration official, along with a spokeswoman for Sen. Bob Casey (D., Pa.), who introduced the Democratic proposal, said raising the fees is consistent with the goal of attracting new sources of private capital back to U.S. mortgage markets. That’s because doing so would raise the cost of loans backed by Fannie and Freddie—currently the cheapest in the market —and allow non-government-backed sources of money to emerge.
Still, raising the home loan-guarantee fees could instead steer more borrowers to seek mortgages from the Federal Housing Administration if that agency didn’t take similar steps to raise its mortgage-insurance premiums. Many real estate groups have objected to the home loan-fee provisions because they say it’s largely unprecedented for revenues that Fannie and Freddie collect to be diverted for other purposes.
In a letter to lawmakers Thursday, the Mortgage Bankers Association, the National Association of Realtors, and the National Association of Homebuilders said it is “counterproductive” to direct revenue from Fannie and Freddie “for purposes unrelated to the safety and soundness of the housing finance system.”
Read the original WSJ article, > Fannie and Freddie Fighting for Payroll Tax Entitlements
