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Wednesday, January 11, 2012

Mortgage Cost Increase to Pay for 2-Month Extension of Payroll Tax ‘Holiday’

[Published in the Denver Post on Jan. 12, 2012]

It was big news in December that the House Republicans caved in and agreed to extend the federal payroll tax “holiday” for two months, as agreed by Senate Republicans.

But what didn’t make the news was where the money would come from to pay for that tax reduction.  It’s going to come out of the pockets of homebuyers in the form of increased loan costs.

I was first made aware of this by a Jan. 5 email from a respected mortgage consultant. I confirmed it this past Sunday in a conversation with Rep. Ed Perlmutter in Golden.

The mortgage consultant wrote: “For conforming products, it has been determined that something known as a Guaranty Fee that all lenders pay to the Government Sponsored Entities [Fannie Mae & Freddie Mac] will increase by 10 basis points in yield. Effectively, that means all conforming loans will increase almost .125% in rate. [Fannie and Freddie] are requiring this increase for loans delivered to them beginning in the second quarter of 2012. You will see the increase effective on Wednesday, Jan. 11, 2012. In some cases, the actual rate impact will be as little as 27 basis points. In other cases, the impact will be as high as 77 basis points. And the impacts will vary day-to-day, depending on the rates and the market’s attitude.” (A basis point = 1/100th of 1%.)  

FHA loan costs will go up by an equivalent amount.

According to Rep. Perlmutter, you can thank the Republicans for this development.  The Democrats wanted to pay for it with a tax on those earning over $1 million per year, but the Republicans would not allow it and, to honor their no-tax-increase pledge, came up with this non-tax approach to providing the required offsetting revenue. According to the email I received, it will take 10 years for this mortgage cost increase to offset that two-month payroll tax reduction.

I’m amazed that Republican leaders continue to think they can attract votes from the general population by doing whatever it takes to keep taxes low for the top 1% of the population.  I suspect they are only providing ammunition that will cost them in the 2012 elections.

I lived in Washington, DC, when I was a reporter for the Washington Post in 1968. I’m keenly aware that the 550,000 residents (mostly Democrats) of our nation’s capital do not have voting representation in Congress.  DC’s license plates declare “Taxation Without Representation.”  Wasn’t that the rallying cry at the Boston Tea Party?   Why isn’t today’s Tea Party working to right that injustice?


  1. Here's a comment from another respected mortgage broker, who requested to remain anonymous, so I'm posting it under my name:

    Your article about the added fees for Fannie/Freddie/FHA loans was interesting, but everyone in the media has missed the real story. What this does is tinker with the competitive position of the government sponsored enterprises (Fannie & Freddie). This makes the GSE loans less competitive with private securitizations. Long term, I see this as an important step in a consolidation of the mortgage industry into an oligopoly of less than 10, maybe less than 5 companies. These are companies that have wanted to control the market but couldn't as long as Fannie/Freddie/FHA existed. Now that they have the tax in place, it will only go up and ultimately take these loans out of the market. I pointed this out before the vote, but it was too late. If you want an idea of who is behind this, look at who has grown mortgage market share over the last 10-15 years.

  2. This was not the House Republicans doing at all! I'm not sure how Rep. Ed Perlmutter came about with his conclusions on Jan. 8th, but I received the following message, from Rep. Mike Coffman, on Dec. 21st:


    Sent: Wednesday, December 21, 2011
    Subject: Update

    "The House version that I voted for paid for a year-long payroll tax cut by freezing the pay of federal workers and members of Congress for three years while the Senate version stripped all that out and instead tacked on higher fees on all new FHA mortages for the next 10 years to pay for their 60 day payroll tax cut."

    "The Senate was in such a rush to get out of town and start their vacations that they didn't complete their work and slapped together another stop-gap short-term measure that will do nothing to create the certainty that this economy needs to expand and to create jobs.

    Just like any legislative measure before Congress, the Senate has an obligation to send conferees to negotiate the differences between the House and the Senate in a conference committee before they go home."

    Congressman Mike Coffman