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Mortgage lenders foot bill for payroll cut extension

Family lending

Bob Moon: So the deal is done. Within a matter of a few hours, Congress passed and President Obama signed an extension of this year's payroll tax cut. For all the legislative huffing and puffing over the deal, the results are underwhelming: Just two months worth of the payroll tax break, extended unemployment benefits and a delay in Medicare reimbursement cuts.

The cost? Around $33 billion. Our D.C. bureau chief John Dimsdale has been looking into how it's being paid for.


John Dimsdale: There are no tax hikes on millionaires, no spending cuts, no deficit increases. Instead, mortgage lenders will pay higher fees to guarantee their loans with the government mortgage finance companies Fannie Mae and Freddie Mac. That increase will be passed on to mortgage borrowers.

Bose George: At the borrower level, it’s not good but we think the impact is going to be very moderate.

Bose George, a mortgage analyst with Keefe, Bruyette and Woods, says, starting in January, anyone who takes out or refinances a $200,000 mortgage will pay about $17 a month more. 

George: If you’re getting a mortgage now and your rate is say 4.25, the guarantee fee component is only two tenths of a percent of that. Taking your rate, say, from 4.25 to 4.35. 

He says right now, the fee increase won’t even be noticed by most borrowers because mortgage rates have fallen to record lows.  But the fee hike -- some call it a tax on homeowners -- will be felt long after the income it generates has been spent, says mortgage economist Tom Lamalfa.

Tom Lamalfa: If one looks at this on the basis of a 30-year mortgage, it translates into a cost increase of about $4,000. And that’s for what amounts to only a two-month payroll extension.

If you think this is hard, just wait until the new year when negotiators try to find a way to pay for 10 months more of the payroll tax holiday.

In Washington, I'm John Dimsdale for Marketplace.

About the author

As head of Marketplace’s Washington, D.C. bureau, John Dimsdale provides insightful commentary on the intersection of government and money for the entire Marketplace portfolio.
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