Not long ago Congress passed the Middle Class Tax Relief and Job Creation Act of 2011. Under this legislation payroll taxes were reduced by 2 percent for a short time but the mortgage guarantee fees (g-fees) charged by Fannie Mae and Freddie Mac to lenders were increased by .1 percent.
While the payroll tax provision has ended and paychecks are now smaller, that “little” .1 percent g-fee increase continues and — by the way — it’s not so little: It’s expected to raise $35.7 billion for Uncle Sam over ten years.
There might be some justification for a higher g-fee if the money went to make mortgages cheaper, reduced foreclosure levels or helped Fannie Mae and Freddie Mac, but that’s not the case. Instead, the money is simply a tax which takes money from loan borrowers — including VA borrowers — and sends it directly to the US Treasury.
How did this happen?
In 2008 the federal government took over Fannie Mae and Freddie Mac on the grounds that they might go bankrupt.
This is a big deal for VA loan borrowers because mortgages of all types are bought, sold, insured and guaranteed by Fannie Mae and Freddie Mac. In effect, they operate much of what is known as the “secondary” market, the electronic platform where investment capital from all over the world is used to buy US mortgages, including VA loans. Such a market holds down mortgage costs and assures that loans are available nationwide. Any interruption in the secondary system would cause mortgage rates to soar.
So far the government has spent $187 billion propping up the two companies. That’s a huge amount of money but it doesn’t quite tell the whole story: Fannie Mae and Freddie Mac have already repaid some $50 billion to Uncle Sam and more is on the way.
Meanwhile, the new and higher g-fee –a fee paid by all lenders who use Fannie Mae and Freddie Mac, including VA lenders — sends money directly to Uncle Sam. Because lenders pass on such costs, borrowers pay extra money for their mortgages and the cash is used to off-set general government spending. In other words, the higher g-fee is simply a back-door tax paid by some taxpayers but not others. The extra money raised by the higher-fee does not even count as a reduction of the $187 billion advanced to Fannie Mae and Freddie Mac.
Now there’s a bi-partisan effort on Capitol Hill to end the raids on new mortgage borrowing. Senators Bob Corker (R-TN), Mark Warner (D-VA), David Vitter (R-LA), and Elizabeth Warren, (D-MA) have introduced the Jumpstart GSE Reform Act.”
“The legislation,” said the group, “would prohibit any increase in the guarantee fee — which is required to be charged by government-sponsored enterprises Fannie Mae and Freddie Mac — from offsetting other government spending.”
Under the bi-partisan proposal the guarantee fee could go up — but only if the money is used to improve the mortgage system. For instance, higher g-fees could be used to speed the repayment of the cash loaned to Fannie Mae and Freddie Mac, knock down mortgage costs or expand foreclosure-prevention programs.
All in all, the bipartisan group is on to a good idea.
Photo courtesy compujeramy