Homebuyers pay for ‘raids’ on Fannie and Freddie

Commentary: Mortgage surcharges let lawmakers keep pledges not to raise taxes

There’s an ominous trend taking shape below the headlines in Washington this political season that anyone involved in home sales, financing or building should keep an eye on.

It’s called raiding the cookie jar of the helpless: squeezing more money for federal purposes out of the home lending process without calling it a "tax" by jacking up fees at Fannie Mae and Freddie Mac.

After a raid, consumers purchasing homes or refinancing end up paying relatively small amounts extra in mortgage fees — adding anywhere between one-eighth and one-quarter of a percent onto their loan rates. Hardly anyone’s the wiser because the surcharges show up nowhere in the process.

But with 60 percent-plus of all new mortgages now being funded by Fannie and Freddie, the extra amounts raised by mortgage fees rapidly can total into the tens of billions of dollars over extended periods.

The danger of new fees tacked onto conventional mortgages stems from two developments: first is the looming "fiscal cliff" facing the federal government by year-end, when Bush-era tax cuts expire and disastrous cuts in spending kick in.

Second, there is a perception on Capitol Hill — a correct one — that the two giant companies now under government control have no one left to protect them from financial assaults. That means they are fair game when revenues need to be raised without violating no-new-taxes pledges.

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So after the November elections, if the lame duck Congress needs billions of dollars in fresh revenues to avoid plunging over the cliff Jan. 1, Fannie and Freddie will be available as convenient money pits. There is sentiment among some members of Congress to hit them — again –  if needed to fill revenue gaps that would otherwise be too painful politically.

Adding surcharges on to new mortgages is pain-free, except maybe for short periods of yelling by the big real estate lobbies such as the National Association of Realtors, the homebuilders and mortgage bankers. After a couple of weeks, the yelling stops. The budgetmeisters in the House and Senate know it well.

How big, attractive and vulnerable Fannie and Freddie are was demonstrated late last December when Congress needed a quick fix to fund a short-term extension of the federal payroll tax. By imposing just a 10 basis point (0.1 percent), 10-year increase in the so-called "G-fees" (guarantee fees) that Fannie and Freddie charge lenders — and which invariably get passed on to new borrowers — Congress raised what its own budget office estimated to be $35.7 billion in additional federal revenues over the coming 10 years.

Admittedly, there may be fiscal gimmickry involved here — after all, who can say that Fan and Fred or successors will still be around in 2021? And what’s the connection between payroll taxes and housing finance?

But since there have been no political prices to pay for any congressmen or senators for singling out Fannie and Freddie to subsidize other people’s spending problems, the precedent has been set: In the end, you can hit up housing and pick up prodigious amounts of revenue simply by targeting Fannie and Freddie during a period of low interest rates.

Raising G-fees are part of another political strategy as well: The move to phase down Fannie’s and Freddie’s operations by steadily pushing the costs lenders pay for doing business with the two companies towards a level comparable to a private secondary mortgage market system that would replace them.

At the end of August, the regulator of both companies, the Federal Housing Finance Agency (FHFA), raised G-fees another 10 basis points and hinted that in some parts of the country, fees could go much higher.

But that begs the question: What private replacement system of financing are we talking about? There is no politically viable replacement currently in sight.

If Obama is re-elected and the Democrats retain the Senate and make inroads in the House, forget about the sort of totally private secondary mortgage market that the Republicans favor. Some sort of entity with the power to make federal guarantees on conventional mortgages will be the centerpiece of any Democratic-designed replacement system.

Even if Romney and the Republicans sweep the races and take control of both houses, it’s still not clear what sort of private solution — dissolving Fannie and Freddie, selling off their assets to private investors, and turning the all mortgage finance over to the banks — would emerge.

Which is why David Ledford, senior vice president for housing finance and regulatory affairs at the National Association of Home Builders, complained to me recently about the G-fee increases — and the threat of a fiscal cliff raid on Fannie and Freddie late this year.

"We’re moving forward (hitting borrowers with new fees) without a comprehensive plan," Ledford said. "This is a transition without any mandate to create a new system, and step by step we are affecting housing affordability."

Lawrence Yun, chief economist for NAR, says he too is worried that politicians on Capitol Hill may yet again target Fannie and Freddie as revenue patsies — a move he calls "a pure transfer of income unrelated to loan performance, a money grab" that unfairly penalizes "today’s buyers or the sins of the past."

The lame duck session starts right after the November elections, but alarm bells should be going off now.

Ken Harney writes an award-winning, nationally syndicated column, "The Nation’s Housing," and is the author of two books on real estate and mortgage finance.

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