San Francisco Mortgage News

Quit Being Politically Correct By Calling it a “G” Fee, Say “Hello!” to Our New National Mortgage Tax!

The New Year has dawned and we can all rest peacefully during the months of January and February with the knowledge that HR 3765 is in firmly in place!  For those of you that may be unaware, HR 3765 is the all important legislation that was passed to extend the payroll tax cut for 2 months. During these 2 months, our esteemed legislators will figure out a way to extend and finance the extension through the end of the year.  Based on past experiences with this type of tactic (read budget deficit reduction) we can only imagine how entertaining the next 2 months will be!!  But first, let’s take a look at how they financed the 2 month extension ……………

To make it clear and simple before the longer winded explanation, let me start by saying that our legislators slipped one by you during the holiday season! In essence, they have now implemented a National Mortgage Tax that will be in place in perpetuity as a means to pay for the 2 month extension.  That’s right, they slipped one to you and you slept right through it!

This so called National Mortgage Tax (I’ll use NMT going forward) is disguised under the name of Guarantee Fee.  You see, the bill mandates that all loans backed by Fannie Mae or Freddie Mac (87% of the conventional loan market in the US) are to be levied a guarantee fee of 10 basis points (.10) and that this fee will be a pass through from Fannie and Freddie to the US Treasury Department.  What it means as far as your next mortgage is concerned is an increase of .125% in rate or and increase in .50% in point cost for the same rate you would have received for less.  In other words, the before and after looks something like this:

 Before the “G” Fee                

4.000% @ 0.000 points                     

After the “G” Fee

4.000% @ 0.5000 points  OR

4.125% @ 0.000 points

Either way, from this point forward and forever, the government will be collecting a TAX (they don’t call it that) in the form of this guarantee fee on any person that obtains a purchase or refinance mortgage that is backed by Fannie Mae or Freddie Mac.  As I mentioned earlier, this currently represents 87% of all conventional mortgages funded in the US.

The fee is designed to be in place for 10 years (again to finance 2 months!) but rest assured that the check book is now open and this fee is never going away.  The fee is already being priced into the market and while we have seen a strong rally on the MBS market it has not translated into lower rates as a result of this new fee. In dollars and sense, for a $400,000 mortgage you can either choose an additional $2,000 in cost or a monthly payment increase of $28.94 compared to the “pre” “g” fee world.  That monthly payment difference equates to $10,418.40 out of pocket on a 30 year loan!

The speculation with all of this is that now that the portal for financing government costs or “tax cuts” is open with Fannie and Freddie, we will see more of this type of structure going forward.  So a 2 month tax cut is really a permanent tax hike that is disguised by a different name!  Lastly, the rumor mill also has it that the monthly MI factor on FHA loans will increase by the same 10 bps so consumers are not incented to choose FHA over conforming and upset the current balance of power between the 2 loan types.

So here is to 2012 and HR 3765! I can’t wait to see what they come up with as a way to finance the payroll tax cut for the remainder of the year!