Posted by: Scott Groves | February 14, 2012

Payroll tax holiday sticks it to new home-buyers

It never ceases to amaze me how good the government is at switching around revenue generating activity in order to make one group feel good about themselves while simultaneously sticking it to a less-aware group of citizens.   Taxes are taxes.  Fees are fees.  It’s all money that comes out of the economy no matter how you shift it around.

The most recent example of this is the Temporary Payroll Tax Cut Continuation Act of 2011.  This Tax Cut extended the 2% payroll tax “holiday” of 2011 into the first two months of 2012.

Sadly, to offset the  $20 billion cost of the payroll tax cut extension, Congress has increased a lesser known “Guarantee-fee” charged by Fannie Mae, Freddie Mac, and the FHA.

This new shifting of revenue mandates that the fee must rise by at least 10 basis points (o.01%) on every loan that Fannie Mae, Freddie Mac and the FHA insure or purchase.

This increase to the  g-fee, as it’s called through the industry, is now affecting borrowers who are attempting to lock-in their mortgage rate for 45 days or more on purchase or refinance transactions.

With buyers generally excited about mortgage rates that are hovering at around 4% for a 30 year fixed, the Government knows it can sneak in these fees without upsetting voters or raising suspicion as to how this revenue is being generated.

Paying an extra 10 basis points, or roughly 1/8th of a point over the life of a mortgage loan is not a trivial amount of money.  On a $400,000 mortgage (about average here in Southern California) this interest rate hike will result in roughly $400 ya ear being taken out of the pockets of new home-owners.

As recently noted by the Wallstreet Journal, the total cost of these rising g-fees far surpasses the few hundred dollars an average taxpayer will save with a 2-month extension of the payroll tax cut.  Additionally, with this cost being baked into residential mortgages, it will be an added tax on home-owners for up to 30 years.

With the housing market still struggling throughout much of the country, this is not a cost the government should have added to the mortgage process.


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