Mortgage Fees Would Rise Under Payroll Tax Cut Deal

Mortgage Fees to Rise

Homebuyers, beware.  There is a sneaky clause that will raise mortgage fees  in the payroll tax bill.

In exchange for a short two-month tax cut or continuation of the payroll tax cut, the Senate on Saturday approved a permanent increase in mortgage fees attached to mortgages backed by Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA).

The mortgage fee hike would apply to new mortgages and new refinances, and would last for the life of the loans.

The increase in mortgage fees is meant to pay for the roughly $33 billion package the Senate approved Saturday to extend a 2 percentage point payroll tax cut for another two months. The Obama administration says 160 million people benefit from that tax cut.

But the provision for increasing the mortgage fees would have a much more widespread long-term impact, considering nine out of 10 mortgages go through one of the three government-sponsored finance organizations affected.

The mortgage fee increase would amount to about $15 a month more for a $200,000 mortgage, according to a senior Democratic official.

That’s $180 a year, for a $200,000 mortgage. Homeowners would have the mortgage fee hike built into their loan through a higher interest rate.  Then the mortgage servicer would then send that extra revenue to the Treasury.

The idea behind the increase in mortgage fees is to encourage more homeowners to get into the private market, as opposed to seeking loans backed by troubled entities like Fannie and Freddie.   However, there is no private market for borrowers to obtain loan from.  Most bank sell their mortgage in the secondary market to FNMA, FHLMC or get FHA insurance.

“Taxpayers are losing every quarter on Fannie and Freddie,” a senior Senate Democratic aide said. “We want to lessen the burden on the taxpayers (who are on the hook for failed government-backed loans).”

The aide added, “This is an incentive to go to the private-sector mortgage market.”

This is just another case of how disconnected Congress is from the general population.  A person making $60,000 per year will get a break for 2 months of $200 total.  If they take out a new 30 year mortgage or refinance a $200,000 loan for 30 years the mortgage fees will cost them $5,400 less the $200 savings for a total increase of $5,200.

While lawmakers will say that the mortgage fees mean the payroll tax cut is fully paid for, the timetables for the tax cut itself and the revenue from the mortgage fees are very different.

The Congressional Budget Office estimates that while the tax cut lasts two months, it will take 10 years for the associated fee hike to drum up an estimated $35.7 billion and replenish the lost revenue. That rhetorical tactic is common on Capitol Hill — lawmakers frequently say bills are “paid for” when in fact it takes a decade for that to be the case.

Maybe lawmakers should scrap the 2 month extension to the payroll tax cut and make some real changes?