What does a U.S. immigration program have to do with the housing market? Nothing. Yet lawmakers are once again attempting to tap mortgage-finance giants Fannie Mae and Freddie Mac to fund unrelated legislation, this time to cover the cost of increasing the number of green cards for foreign graduates with advanced degrees. Fannie and Freddie, it seems, have become Washington’s favorite piggy bank.
Some may see this as a good thing. The U.S., after all, spent $190 billion bailing out the companies, so why not siphon some of the money back to pay for other priorities? The reality is that doing so raises mortgage costs for borrowers regardless of their credit risk, threatens to stall the housing market’s comeback and lowers the odds that Washington will ever fix the two companies.
To pay for the immigration bill it passed last month, the U.S. House voted to extend for one year higher fees Fannie Mae and Freddie Mac charge lenders to guarantee the loans they make to home borrowers. Last year, Congress increased the so-called guarantee fee by 10 basis points (0.1 percent) through 2021 to fund a payroll-tax cut. The House bill extends the higher fees, which reflect a loan’s expected rate of return, through 2022. The measure isn’t going anywhere -- it faces a presidential veto threat and was blocked this week by the Senate -- but the temptation to tap Fannie and Freddie whenever Congress needs a ready supply of cash is likely to grow.
There’s no question guarantee fees should slowly increase. Fannie Mae and Freddie Mac don’t make mortgage loans but guarantee them by charging lenders a fee to cover projected losses from defaults. For too long, the companies underpriced risk and charged too little for the mortgages they were agreeing to back, which is one reason they were bailed out and placed under government control.
Absent a broader effort to overhaul housing finance, raising fees with no consideration to their effect on the housing market poses new risks. The guarantee fees are passed on to borrowers, typically through higher interest rates. Raising fees too quickly could hamper the housing recovery by making it more expensive to borrow. Higher fees also thwart the Federal Reserve’s attempts to stimulate the economy by keeping interest rates low.
What’s more, guarantee fees have already been slowly rising, according to the Federal Housing Finance Agency, which oversees the companies. Fees averaged 0.28 percent in 2011 and are expected to average about 0.48 percent in 2012 as a result of the payroll-tax increase and a separate fee increase ordered by the housing agency. A 0.1 percentage point bump adds about $4,000 to a 30-year, fixed mortgage of $200,000.
Rather than divert guarantee fees to unrelated causes, Congress should use them to attract private capital back to the mortgage market once the housing recovery seems on solid footing.
Higher fees could lure private lenders by raising interest rates for borrowers whose mortgages are backed by Fannie Mae and Freddie Mac, making such loans more profitable for the lender. Higher fees could also encourage borrowers to seek out cheaper alternatives to Fannie- and Freddie-backed mortgages. The FHFA already is gradually raising fees as part of a broader attempt to reduce the companies’ roles in housing finance, and is considering a plan to charge higher fees in states where default costs have been above the national average.
Right now, Fannie Mae and Freddie Mac own or guarantee almost 84 percent of mortgage debt. Private capital is almost nonexistent, largely because of the heavily subsidized presence of Fannie and Freddie. Until the government decides what role it wants the companies to play, including whether they should provide any type of mortgage guarantee, private capital is likely to stay on the sidelines.
A new Bloomberg Government report says the mortgage giants will probably escape a major overhaul in President Barack Obama’s second term because they are no longer draining taxpayer money and instead are returning funds to the Treasury. Both reported third-quarter profits, forgoing Treasury Department cash infusions.
Fannie Mae and Freddie Mac are finally healing, and Congress should resist the impulse to turn to them whenever it needs a ready supply of cash. The companies are supposed to smooth out the ebbs and flows of the mortgage market, not serve as ATMs.
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