Market Conditions: How to Pay for the Payroll Tax Cut Extension? Tax Mortgages
I don’t know how many of you are paying attention to what is happening in Washington with the discussion over extending the payroll tax cut.
The latest is a 2 month extension mainly so that Congress can get home for the holidays and then continue fighting about it in 2012.
A 2-month extension of the payroll tax cut would cost $33 billion.
How are they going to pay for that?
Apparently, by taxing Fannie, Freddie and FHA mortgages and refinances.
The new 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, or $360 a year for a $400,000 mortgage. Homeowners would have the fee hike built into their loan — the mortgage provider would then send that extra revenue to the Treasury.
The idea behind the fee is to encourage more homeowners to get into the private market, as opposed to seeking loans backed by troubled entities like Fannie and Freddie.
“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.”
But at the moment, about 90% of all mortgages are made through Fannie, Freddie or FHA. There is virtually NO private-sector mortgage market for middle class home buyers.
The extended payroll tax cut will give someone making $50,000 a year an extra $165 for those 2 months.
It will also take Fannie, Freddie and FHA about 10-years to pay for the $33 billion extension.
Does it sound like Washington is planning on getting rid of Fannnie and Freddie or ratcheting down FHA any time soon?
Will these new fees just put another nail into the housing market or will homebuyers simply not really notice?
Mortgage fees would rise under payroll tax cut deal [Fox News, December 17, 2011]
Please, please, please get rid of Fannie and Freddie as soon as possible. Nothing makes a bubble like government intervention.
If it isn’t apparent the boys in Washington just don’t get it. Another “kick the can down the road” play.
Well- if this deal goes through Mike HG, then it’s clear that Washington has no intention of getting “rid” of Fannie and Freddie for at least another 10 years (because that’s how long it will take to pay for this 2-month extension.)
I wonder where they’ll get the money to extend it further than the 2-months? You can only go after home buyers so many times, right?
The collapse of private lending killed the bubble. No more liar loans etc. Moreover, Fannie freddie are finally under control with stricter lending standards. For once, government control is a good thing.
I actually did a blog post on a couple of days ago. I would gladly welcome higher Fannie and Freddie fees, but not to just bring in more revenue. Fannie and Freddie are a disaster and the SEC just charged 6 former executives with fraud. Of all bailout money only the Fannie and Freddie bailouts will not be recovered. The service they provide has been underpriced for years. Losses are now estimated to be $140B. Let’s get the government out of the housing market.
Oh…and I think the role of Fannie and Freddie will be reduced over time and this could be the beginning of that . Supposedly even Barney Frank now believes they should be abolished.
Of course the Mortgage Banker’s Association, the NAR, and the NHB are all up in arms over all this.
I know several people who recently got mortgages with regular banks. It’s not so difficult to get conventional financing if you save 20% and have good credit. It’s not that difficult to save 20% and have good credit if you are willing to sacrifice. These government agencies should not hand out money to people who can’t afford to buy. Maybe the market would start to stabilize if they eliminated Fannie and Freddie. It would be painful for awhile if they were to be eliminated, but I think it would give the market a chance to even itself out.
Jenny.
Where someone gets the mortgage is irrelevant. There are very few banks that actually hold the mortgages on their books. More than likely your friends mortgages got securitized into Fannie or Freddie securities. The agencies served a purpose when they acted as a conduit between originators and investors – ie. they performed the role of bundling mortgages into securities. In my opinion where it all went wrong was when they got greedy and rather than selling the loans to the investor community they kept the loans on their own books and in doing so took their own balance sheet leverage to unsustainable levels. The right answer is to force the agencies to return to their core business ie securitization and restrict their balance sheet so that they can’t have the stupid amount of leverage that got them in trouble.
Jenny,
Fannie and Freddie provide liquidity to the conventional mortgage market. Your friends were most likely beneficiaries of their generosity.
I just find it hilarious that the left hand doesn’t know what the right is doing. On one hand you have the Fed trying to lower rates and then you have the agencies and other entities doing things that raise rates.
I definitely don’t see this as a kick the can down the road kind of play.
Barring some Machiavellian plot behind this that I’m too dim to see, I think it is a good move. Make these government backed loans more expensive over time, force people into the private market over time, phase out these agencies. I mean, clearly this isn’t the only move that will need to be taken, but it’s good to see movement in the right direction.
“:It’s not that difficult to save 20%” Plus the cost of the loans, the attorney fees, the inspection, etc. It all adds up. Luckily, if you have good credit, you can still get a decent rate with less than 20% down.
Russ: “I just find it hilarious that the left hand doesn’t know what the right is doing. On one hand you have the Fed trying to lower rates and then you have the agencies and other entities doing things that raise rates.”
True, but a reduction of interest rates effects a much broader swath of the economy than real estate. To me the effects on real estate are more of a side effect of a temporary move to inject liquidity into the economy. At this point, I’m not sure I agree with lower rates, but it really doesn’t strike me as a “prop up RE” move.
I say kick the can because they are paying for a 2 month benefit with a 10 year obligation. Definitely Washington at its finest
I don’t think many of thosr adbocating getting rid of fannie & freddie have a good grasp of ehat would happen to rates, mortgage availability & in turn house prices. I do and I’d be one of the remaining few to qualify in the private insurance market and would gladly pay 125bps additional if it mramt flushing the joe blowd out of the market and a cade shiller index of 70.
Obviously my autocorrect has a case of the mondays
Bob is correct. What do you think will happen to prices if Fannie and Freddie were gone?
Icarus, I don’t disagree that there are different objectives (raising revenue vs. stablizing housing market) but you’d think the Govt would be more coordinated on the effects. The Fed is attempting to lower rates through quantitative easing, yet the regulatory bodies and bureaucrats keep doing stuff that drives rates up. It begs the question as to who is driving the train?
Rates aren’t as low as they would be had there not been interference with other bureaucrats reversing the effects of the Feds moves. I figure rates are a good .25% higher than they should be.
Jenny, I’m sorry you are clearly out of touch with first time home buyers. It IS difficult to save 20% especially if you’re buying in Chicago or any urban market. For a $200,000 condo (which seems to be a good price point for a single, professional first time home buyer) that’s $40,000+ and doesn’t include closing fees, inspection fees, and lawyer fees etc., FHA is great if screened correctly and given to people who can carry a monthly mortgage. Most people renting are most likely paying more for rent than they would be paying on a low interest mortgage and if you abolished FHA, you would see your crop of first time home buyers in the city go down dramatically either due to longer renting periods or looking for homes outside the city. Don’t blame the government, I believe there are quite a few conventional (non FHA) loans that defaulted out there. Most of those loans I would imagine are people who feel just because they CAN save that 20% down payment they deserve to buy a home out of their budget.
“A 2-month extension of the payroll tax cut would cost $33 billion.
How are they going to pay for that?”
technically, a tax cut doesn’t cost anything. Who says the revenue gap to the Feds has to be filled? Cut spending. No cost.
Why isn’t it considered inflation when the government raises taxes? When Illinois raised our income tax by 2%, my paycheck didn’t go as far as it once did. My earnings were worth less by 2% than they were previously. When they raised our taxes, I considered it like I would a pay cut at work.
“What do you think will happen to prices if Fannie and Freddie were gone?”
Probably not that much. Mortgage interest rates are the lowest in decades. So what if they went up another 100 BP?
Mortgage availability would shrink without those two and mortgage origination would become less commoditized and there would be substantial spread with rates between banks. But rates would definitely better reflect the underwriting risk far better.
“Mortgage availability would shrink without those two and mortgage origination would become less commoditized and there would be substantial spread with rates between banks. But rates would definitely better reflect the underwriting risk far better.”
…redeeming yourself, by saying something not stupid.
Re. the payroll tax cut extension: It’s a good idea for now because it puts extra money in peoples’ pockets, which will stimulate the economy. I agree that two months isn’t long enough. They need to do it for a full year.
In the long run, once the economy improves, this tax cut will have to be allowed to expire. The problem is, once a tax cut is in place, letting it expire is something Congress has lots of trouble doing (the Bush income tax cuts, for instance).
You have to extend the payroll cut it is the most direct stimulus you can give and it targets the right people I.e. the middle class i.e. me.
Fannie and Freddie are a scam and the perfect example why we need smaller government.
No more ‘stimulus’ EB. And you and policy makers need to learn that the focus exclusively on the short-term GDP metric with the exclusion of everything else hasn’t worked out so well for developed countries.
P.S. Tax cuts don’t “cost” anything, the assumption of revenues lost due to these cuts is preoposterous at best (ever think people would work harder to keep their own money? durrr), then again the liberal media has been beating this into everyone’s brains since Wbush took office a few years ago and now its been repeated so much it is now a “truth”. Yeah we are borrowing to “pay” for them right now but in reality tax cuts can increase revenues (not always of course) due to the increased productivity of the workforce.
Also the assumption that its the government’s money is also annoying, and I see it everywhere in the media today… like they are allowing us to keep the extra 165 a year by doing us a favor, give me a break thats our damn money so why should I feel good about you not taking it from me!
I think GDP is a fraudulent and irrelevant number, as is the CPI and our unemployment rate. Even if it were accurate I would point out that a large part of that number is due to unsustainable deficit spending that is going to at some point have to be cut back even if we don’t pay it back. I don’t see how this can be addressed without rupturing the economy, because either the economy cuts back significantly, or the Fed prints money and commodity prices skyrocket. Either way, our standard of living decreases …
Unless real estate prices continue to fall, offsetting any other increased costs, providing people with more disposable income and really only hurting the idiots still holding bad mortgage loans. I think this may be the best scenario, because for the life of me I can’t figure out why housing is so expensive given the fact there is so much land available in the country. It is crazy. The only reason prices are this high is because of the credit fueled bubble started by Fannie and Freddie.
To sum it up though, I’m tired of the government bailing out everybody that caused our problems instead of the people saving their money and being responsible. So they need to extend the payroll tax cut which is an absurd tax as it stands anyway.
” I can’t figure out why housing is so expensive given the fact there is so much land available in the country”
Here’s a nice 3/2 on almost 5 acres:
http://www.realtor.com/realestateandhomes-detail/336-4th-Ave_Smithwick_SD_57782_M74451-48383?source=web
Maybe the reason that “housing” is so expensive, even tho there is sooo much land, is that the land ain’t where “most” people can find jobs and/or want to live. I promise you that I could find you *hundreds* of perfectly livable family-sized homes for under $150,000 somewhere out there on all that land. Whether you have any interest in living 72 miles outside of BFE is your problem.
That, plus a shift toward “luxury” fixtures/finishes/appliances.
“Please, please, please get rid of Fannie and Freddie as soon as possible. Nothing makes a bubble like government intervention.”
I agree (because I want home prices to plunge so I can buy one on the cheap). In the absence of FNA/FMAC and the implicit (now explicit) federal guaranty, are there institutional investors that will invest in U.S. residential mortgages (and thus provide the liquidty to make the mortgage loans)? I will give you a hint. The answer is two letters and begins with “n”.
It might be ‘easy’ to save 20% but it’s still not prudent in this econony to tie up that amount of cash, especially in property.
“are there institutional investors that will invest in U.S. residential mortgages (and thus provide the liquidty to make the mortgage loans)? I will give you a hint. The answer is two letters and begins with “n”.”
Of course they will. Just will be priced more accurately.
“It might be ‘easy’ to save 20% but it’s still not prudent in this econony to tie up that amount of cash, especially in property.”
And in this economy, it’s not prudent, to lend to someone who doesn’t.
“Unless real estate prices continue to fall, offsetting any other increased costs,”
RE can only goto zero. Will that offset the increased taxes, assessments, and increases in other categories? Look at all of those co-ops going for dirt cheap in the GC or on LSD..you can’t give some of them away given the other liabilities associated with them.
“Of course they will. Just will be priced more accurately.”
You are right. But the substanitally higher rates will further reduce the pool of possible buyers which means reduced demand for homes for sales. Of course rents will be higher which could prop up prices.
A Democrat!?
You know its bad when a Democrat has got to start telling people that the private sector is better than the government run
ouch!!!!
According to CalculatedRiskBlog, real house prices continue their rapid descent:
http://1.bp.blogspot.com/-VXxoXHcepyQ/TtUXYdXb3BI/AAAAAAAALcs/wLCPm9jg094/s1600/HousePricesRealSept2011.jpg
According to CalculatedRiskBlog, the price to rent ratio continues to drop rapidly, but remains 15% above mid-90s levels.
http://2.bp.blogspot.com/-GlHxJr78uS4/TtUXYx_Y5II/AAAAAAAALcw/uQ_WqfIbM_0/s1600/PriceRentSept2011.jpg
“I don’t see how this can be addressed without rupturing the economy, because either the economy cuts back significantly, or the Fed prints money and commodity prices skyrocket. Either way, our standard of living decreases …”
Commodity prices don’t skyrocket if most central banks are simultaneously printing electronic money. At least not domestic ones. And the money printing is just transferred to fluctuations in FX rates for trading imports.
But yeah for certain imports, like those from countries with a stable/pegged currency, they might just dry up until this whole money printing thing gets sorted.
“Commodity prices don’t skyrocket if most central banks are simultaneously printing electronic money. At least not domestic ones. And the money printing is just transferred to fluctuations in FX rates for trading imports.”
Wow, you got both parts of that backwards.