GSEs Get Roped into Payroll Tax Tug-of-War

WASHINGTON, DC-There are bipartisan proposals in both the House of Representatives and the Senate to tap the GSEs to help pay for a proposal to extend the payroll tax cut into 2012. Right now, the payroll tax rate is set to increase to 6.2% from its currently reduced 4.2%, in 2012. President Barack Obama has been campaigning hard on this issue, and while the two parties are divided as to how to pay for it, neither wants to be painted as responsible for raising taxes on middle and lower class Americans.
The answer, according to the views of some in Congress, has become Fannie Mae and Freddie Mac. A Senate proposal calls for Fannie Mae’s and Freddie Mac’s fees to lenders to rise by one-eighth of 1% over the next two years, according to the Wall Street Journal.

The House proposal calls for an increase of one-tenth percent of one percent over two years. The Journal notes that in 2010 these fees—essentially the fees lenders pay to the GSE to guarantee their loans when the GSEs purchase them—were one-quarter of one percent. 

The GSEs are easy targets now for Congress, which is becoming increasingly desperate to close out the year with at least few bipartisan achievements. The commercial real estate industry, not surprisingly, is not in favor of this plan.
That is because the end result will be higher financing costs that will exert a drag on housing market outcomes, Sam Chandan, president and chief economist of Chandan Economics and adjunct professor of real estate at the Wharton School, tells GlobeSt.com.

“At least since the advent of the GSEs, the long-term mortgage commitment rate has been almost perfectly correlated with the yield on comparable duration Treasuries,” he says. “The relatively narrow spread between mortgage rates and the risk-free rate reflects a number of factors, including fees and transaction costs. A proposal that would increase the fees paid by banks to the agencies will necessarily raise financing costs by exerting upward pressure on those spreads.”

Not that financing costs are the only determinant of the housing market’s recovery, although clearly it is important, he adds. “One might argue that the tradeoff is worthwhile if it means that the payroll tax cut can be extended. But even if you believe the extension is necessary, there are ways to pay for it that will be more efficient than a tax on housing.”