May 30, 2012 / 5:25 PM / 7 years ago

Fannie, Freddie easy prey for cash-hungry Congress

* Fannie, Freddie fees eyed as way to pay for other programs

* Housing industry vows to fight further diversion of fees

* Lawmakers divided over how to pay for student loan fix

By David Lawder and Margaret Chadbourn

WASHINGTON, May 30 (Reuters) - It’s not that the U.S. housing industry believes college students should be hit with a doubling of their student loan rates on July 1. It just doesn’t want to see mortgage costs rise in order to help them out.

Lobbyists involved in the building, selling and financing of homes worry that deeply divided Democrats and Republicans in Congress - who have been unable to find common ground on spending cuts or tax hikes - will once again push up the mortgage guarantee fees that Fannie Mae and Freddie Mac charge lenders.

The move is being mulled by lawmakers as a way to pay for some popular programs in an election year - such as maintaining low student loan rates - without adding to already large budget deficits.

But for many the talk in Congress to again turn to the two financially troubled, government-controlled housing finance firms as a source of cash raises red flags. It comes just months after Congress tapped the two firms’ loan guarantee fees, or G-fees in industry parlance, to fund a two-month extension of a payroll tax cut and jobless aid.

“It sets a very bad precedent for G-fees to pay for anything other than Fannie and Freddie providing insurance on loans. It opens the door for using them as a piggy bank,” said Mark Zandi, chief economist at Moody’s Analytics.

Congress’s last-minute deal in December tapped a 10 basis point increase in the G-fees to the tune of $37.5 billion over 10 years. The Mortgage Bankers Association, an industry group, calculates that the fee increase led to a 1/8 percentage point rise in mortgage rates, adding about $14 to the monthly payment on a $200,000, 30-year fixed-rate mortgage, or some $5,000 over the life of the loan.

Very low interest rates have helped mask the impact. The yield on the 10-year Treasury note, which is used as a benchmark for many mortgage rates, reached its lowest level in at least 60 years on Wednesday. And rates on the average 30-year mortgage have fallen since the end of last year, hitting 3.91 percent last week, according to the MBA, compared with 4.07 percent at the end of December.

But another fee increase would push mortgage costs higher, putting further weight on a housing market that has only just begun to show a little life.

“Here we are raising (mortgage) rates arbitrarily,” said David Stevens, chief executive officer for the Mortgage Bankers Association. “Unfortunately, it’s impacting the housing recovery.”

That said, Fannie Mae and Freddie Mac, which provide the financing for about 60 percent of all new home loans, want to raise the mortgage fees anyway, but they want to use the money to bolster their own finances.

But lawmakers searching for ways to pay for reduced student loan interest rates and a transportation construction bill see few easy ways to come up with the cash they need, and have declined to rule out increasing the fees once again to fund other programs.

“It’s one of the options,” said Democratic Senator Bob Casey, who authored the December compromise with encouragement from the Obama administration. “It’s another place to go look for some revenue.”

Fannie Mae and Freddie Mac have soaked up more than $180 billion in taxpayer aid since being seized by the government at the height of the financial crisis in 2008.

The companies, which stocked up on riskier loans during the housing boom, remain exposed to more than $5 trillion in mortgages and loan guarantees. While both turned a profit in the first quarter, they are burdened by the need to pay dividends to the government for its nearly 80 percent stake.


Fannie Mae and Freddie Mac purchase loans from lenders and repackage them as securities for investors, offering a guarantee against losses from defaults. They collect the fees from lenders to cover the cost of this guarantee.

Although the companies have stemmed losses in recent months, diverting fees away from Fannie Mae and Freddie Mac raises the risk that taxpayers will have to prop them up with more funds.

The question of whether taxpayers will ever be repaid for Fannie Mae and Freddie Mac’s bailout plays out in the broader debate about the appropriate government role in insuring mortgages. Some argue the first step in reforming the housing finance system and winding down the companies should be to raise the fees to recapitalize the firms and whittle down their debt to the Treasury.

Lawmakers on both sides of the aisle think the two government-sponsored enterprises, or GSEs, should eventually be shut down. However, the law to extend payroll tax cuts requires them to remain in business for 10 years to generate the revenue to cover the tax cut extension.

“As long as the GSEs exist in any framework or under any name, it will still smell as sweet as a rose to use them as a funding source to pay for something else,” said Representative Scott Garrett, a Republican who chairs the House panel that oversees the two companies.


Since December, Congress has attempted to tap the fees twice. The most recent effort was in March, when senators Mary Landrieu, a Democrat, and Richard Shelby, a Republican, proposed using them to fund cleanup of Gulf Coast damage caused by the 2010 BP oil spill.

The plan was pulled at the last minute before the Senate could vote on it, but it jolted housing trade groups into action to try to head off any further efforts.

“There’s some exasperation that Congress has browbeat the housing industry for problems in the past and now, when there is a way to ... repay taxpayers, lawmakers pivot and try to plug budget holes,” said Rob Zimmer, a lobbyist with the Community Mortgage Lenders of America.

Casey, like other lawmakers interviewed by Reuters, said the fees were not a first choice as a revenue source but that the list of potential offsets for spending “is not infinite.”

“I just think it’s critically important that we come up with some ways to pay for things. That’s what the American people have to do with their family budget,” he said. Casey is seeking reelection in November against coal-mining magnate Tom Smith, a Republican who is backed by the fiscally conservative Tea Party movement.

In their quest to fund the $6 billion cost of a one-year renewal of the 3.4 percent loan rate for some 7.4 million students, Republicans and Democrats are offering no hint of compromise.

With White House support, Democrats want to end a provision that allows some private companies, including hedge funds and law firms, to avoid payroll taxes. Republicans want to take money from President Barack Obama’s health-care overhaul law.

Senators have blocked both proposals, underscoring the difficulty lawmakers will have in finding a deal that doesn’t compromise their partisan principles and raising the possibility G-fees could be tapped again.

“Perhaps there’s still some headroom there,” Senator John Thune, a member of the Republican leadership, said of G-fee revenues, adding that he wants to try other options first.

House and Senate members are also are haggling over a transportation construction bill. With Republicans refusing to consider tax increases and Democrats defending health care and programs for the poor, G-fees could be tossed into the mix.

“We haven’t started talking about that, yet,” said Dave Camp, chairman of the House Ways and Means Committee.

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