Loan Applicants Are Paying For the Payroll Tax Cut Extension
Before I jump into the Payroll Tax issue, I wanted to make a disclosure about the content in my articles. I use a lot of realistic examples, and I want to assure everyone that I would never discuss a local resident’s scenario. While the stories and examples are true, I never pick on a specific loan transaction. I have lots of places to pull real stories from. I’ve been helping families in CA, NV, and WA for over 20 years, and that’s not counting all the other stories I hear about from other originators I coach around the country. If it ever feels like I’m talking about you, it’s only because the issues I discuss are common.
What does the Payroll Tax cut have to do with home loans? I wouldn’t have thought there was any connection at all until I received a memo from our parent company letting me know that all lenders are increasing their fees in response to the recent legislative action on the Payroll Tax.
I turned to Google and found the basics – what passed was a 2 month extension of a temporary employee Tax reduction that was set to expire December 30, 2011. This reduction amounts to two percent of earned wages up to the low $100k range, or about $166 per month if you earn $100,000. For two months you’ll “save” about $332.
Tax cuts cost money and Congress had to find a way to pay for the anticipated reduction in income. Someone came up with the idea of increasing the Guarantee Fee Fannie Mae and Freddie Mac charge to back home loans. The irony in that choice does not escape me.
Fannie and Freddie have been blamed by the same Congress for being part of the ruination of our housing market. Combined they are on track to need upwards of $500 billion in taxpayer bailout money, and both are in receivership (owned by taxpayers). The craziest part is that Congress wants to abolish both agencies and get the US government out of the home lending guarantee business. But I guess funding Tax cuts via both agencies for the next 10 years sounded like a good idea to someone.
Fannie Mae and Freddie Mac (“Agencies”) don’t make loans to consumers; instead they guarantee the payments to the investors who buy the pools of mortgages. That’s why your rate on your home loan is so low – it’s pretty much guaranteed by the U.S. An investor has very little risk of default; hence they don’t expect to be paid very much in interest. If Fannie and Freddie did not exist you’d be paying a whole lot more for your home loan, but that’s an article for another day.
The Agencies already have a host of fees they charge and those costs are passed directly to you when you refinance or buy a home. Most of those fees increase as the perceived risk of your loan is increased. If you have a 719 FICO you will typically have .50% fee ($1,000 on a $200k loan) added to your cost. If your FICO was 679, you would pay 1.75% ($3,500 on a $200k loan).
The new fee is anticipated to cost .50% and is already being phased in to lender’s pricing. It does not matter if you get your loan from a big bank, credit union, or friendly neighborhood mortgage broker, you will pay the fee.
I’m continually amazed at the state of our political parties and their antics but it’s rare that their games directly impact the cost of a home loan. The good news is that interest rates are still at historic lows so this fee increase is likely to be invisible to you, which was probably Congress’ intent. Let’s keep it hidden and no one will notice.
Michael has 21 years’ experience in the lending industry. In that time he’s directly helped over 1,400 families finance the purchase of a new home or refinance an existing loan. Rebecca has a CPA background in auditing financial institutions which brings an incredible resource to First Priority Financial. They are licensed to help families in the states of WA and CA. If you, or anyone you know, needs help with a home loan call 509-252-9151 or send an email to MMullin@TheLoanConsultant.com.