Loan guaranty fees, the price charged to mortgage lenders and passed along to borrowers on mortgage loans sold to Fannie Mae and Freddie Mac, have almost doubled since 2011.
The reason why is quite simple: An act the 112th Congress of the United States passed in the waning days of December 2011 made this increase something of a foregone conclusion. In fact, the Federal Housing Finance Agency (FHFA) recently closed its public comment period regarding the possibility of yet another guaranty fee increase in coming months. It's as close to a 'done deal' as one can get; a fait accompli.
Enter H.R. 3765 of the 112th U.S. Congress--"The Temporary Payroll Tax Cut Continuation Act of 2011," a legislative wealth transfer scheme if ever there were one. Only this one robs from the homebuyer, whether Democrat, Republican, Independent or other; upper, middle and working-class alike, and pays the United States Treasury for the nation's short-term operational costs. In this particular case, the culprit was a two-month extension of the payroll tax credit and unemployment benefits to long-term unemployed workers in the closing days of 2011. Let's take a brief look back.
In the final weeks of 2011, the 2% temporary payroll tax cut many economists credit for helping stave off a double-dip recession was fast approaching its previously-scheduled expiration date of December 31. Unemployment insurance payments to long-term unemployed workers also faced expiration at year's end. Government officials warned of impending economic doom sure to follow. Washington's response was the Payroll Tax Continuation Act of 2011, passed in the waning days of December, and signed into law December 23, 2011. Among other things, H.R. 3765 extended the payroll tax cut and also unemployment compensation payments to long-term unemployed workers for roughly two months, until February 29, 2012--the most noble of intentions, to be sure; crisis averted. Problem solved, right?
Not exactly. The problem with H.R. 3765 is how it mandated that the two-month, 2% payroll tax cut and its accompanying grab-bag of other short-term policy measures would be paid for. H.R. 3765 explicitly outlines and, arguably requires systemic periodic increases of government-sponsored enterprise loan guaranty fees over the course of a ten-year period, "...by an average not less than an average increase of 10 basis points for each origination year or book year above the average fees charged in 2011."
The additional funds raised by higher Fannie Mae and Freddie Mac loan guaranty fees ultimately find their way to the U.S. Treasury by way of a direct payment; H.R. 3765 makes sure of that. An estimated $36 billion over ten years intended to offset $33 billion in upfront costs in the form of eight weeks of payroll tax deductions and unemployment insurance.
And it gets even better: H.R. 3765 expressly forbids the offset of these guaranty fee increases by pricing reductions in other aspects of mortgage origination. Of course, the typical residential mortgage product is a 30-year contract. In short, homeowners of the recent past and far-reaching future are quite literally being "shaken down" in the truest sense of the term, by way of a new law forcing many of them to pay a 30-year surcharge for a two-month legislative expense.
A recent Wall Street Journal article tells us that cost increases like these are estimated to add an additional $180 each year on average to a $200,000 mortgage loan. Keep in mind, that's each year for 30 years when one considers the typical US mortgage. Think of it as your own little $5,400 personal contribution neatly tucked into your mortgage, used to help make our all-too-predictable annual national budget deficits seem smaller than they actually are.
Meanwhile, the mortgage loans purchased by Fannie Mae and Freddie Mac in recent months are as safe as they've ever been; one only has to look at their own reported data to see average credit scores for purchased loans at FICO levels of 741 and 740 respectively. Of course, this all takes place under the added scrutiny of the January 2014 Qualified Mortgage rule and its "Ability to Repay" clause. Presumably, any such loan purchased by Fannie Mae and Freddie Mac since early 2014 has a verified ability to be successfully repaid.
The more likely goal of a systemic campaign of loan guaranty fee hikes--in addition to the money itself--is a balance in such fees that is more closely aligned to those found among private-sector lenders. After all, H.R. 3765 could be construed as allowing for such an objective in affording the FHFA Director the latitude to "...provide for uniform pricing among lenders" in complying with the measure.
It can be argued that some in Washington regard statutory language within H.R. 3765 ordering the FHFA Director to "appropriately reflect the cost of capital allocated to similar assets held by other fully private regulated financial institutions" as a legislative justification to act as though Fannie Mae and Freddie Mac were indeed private companies operating with an imaginary capital reserve accrued through private sector profit-maximizing market practices. A wholly imagined capital requirement conjured from deep within the foggy depths of pages of legislative-speak.
There's just one problem: Fannie Mae and Freddie Mac, the two government sponsored enterprises currently operating in their 74th consecutive month of conservatorship administered by the Director of the FHFA, are not private subsidiaries owned by the United States Treasury. Accordingly, they should not be expected to behave as such.
In fact, Fannie Mae and Freddie Mac are organizations created by the U.S. Congress for the purpose of helping provide increased access to affordable mortgage credit primarily through the practice of securitization--purchasing residential mortgage loans, packaging them as financial instruments and selling them to investors. This process promotes market liquidity by allowing participating lenders to make more loans at affordable prices. It should also be noted that private market discipline dictates that, in an environment where capital reserves are unnecessary or able to be reduced with regulatory approval, no private financial institution would continue to devote an increasing amount of resources to fund it.
Unfortunately, that's not how things work in the months and years since the onset of the foreclosure crisis and the Great Recession. What has emerged is a housing marketplace where Fannie Mae and Freddie Mac continue to record healthy profits while meandering through an interminable "conservatorship," taking higher guaranty fees from the homebuyers of America--a demographic group already featuring credit scores far in excess of the national average--and remitting the take directly to the United States Treasury, no ifs, ands, or buts. A pretty nice deal--if you can get it. Only you can't.
H.R. 3765 is symptomatic of a dilemma far grander than the details of any one single act of Congress. Real housing finance reform has not happened in America. What has evolved is perhaps as troubling as the factors that brought us to the brink of financial calamity. You see, the rules of reform are being authored and implemented by the very institutions these same rules are intended to reimagine and redirect. Fannie Mae and Freddie Mac are lead authors of the very rules by which they are intended to abide, for the good of us all. The unfortunate result is that the parties benefiting most from said "reforms" also happen to be the same parties responsible for their very design.
Let's be clear: The Temporary Payroll Tax Cut Continuation Act of 2011 was, and still is unfair to America's homeowners and prospective homebuyers alike. It is little more than a stealth tax hike on the homeowner of today, tomorrow, and many tomorrows still to come. It also starts lawmakers down the slippery slope that is the emerging congressional practice of shaking down the unwitting homebuyer to pay for all things great and small for decades to come by cloaking it within the origination cost of a standard 30-year mortgage.
The homebuyer of tomorrow should not be asked to pay for the fleeting temporary tax reduction and unemployment benefit extension of yesterday. And, they shouldn't be led to believe that there's any greater rationale for higher guaranty fees at Fannie Mae and Freddie Mac besides the fact that the homebuyer public is underrepresented as a political force in Washington, and as such, can't do much about it. That's it.
And so it goes.