Tax Cut Extension Raises Mortgage Rates

Wednesday, January 25, 2012

Your Federal Government is at it again, robbing Peter to pay Paul.  On December 23rd Congress and President Obama gave the housing market a black eye when they decided they could raise mortgage rates to pay for a two month extension to the payroll tax cut that has been in place for the past year.  How did they do that?

Well, as you all know, the government is acting as conservator to Fannie Mae and Freddie Mac (commonly known as the GSE’s) in the wake of the housing meltdown and so they can make up the rules as they go.

What they did was to increase the guarantee fees the GSE’s charge to lenders on loans they make.  The increase amounts to .1%.  This increase stays in place until October 2021 – 10 years. It doesn’t sound like much but that increase will translate to a .125% to .25% increase in the rate of every new conventional mortgage taken out over the next 10 years! 

Extending a payroll tax cut for 2 months increases mortgage rates for 10 years?  I don’t know about you, but that doesn’t sound like a good trade off to me.  A .25% increase in your $200,000 mortgage over 30 years amounts to extra interest costs of $7,615!!  Sounds like a small change but it ends up costing everybody who gets a home loan over the next 10 years a lot of money.  Ouch . . .

The real issue here is that the Federal Government has decided it can use money made on new mortgage originations to pay for general government spending.  That is just wrong.  If they said they were going to increase mortgage guarantee fees to pay for a homebuyer tax credit I’d be all for it because the extra mortgage cost is being used to help bolster the housing market and that would make sense.  Paying for a 2 month tax cut with 10 years of higher mortgage rates does not make sense!

Another reason to contact your local congress people.


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