Feds want mortgage role cut, but it's growing

Washington lawmakers, who began 2011 with sweeping plans to shrink the U.S. government's role in mortgage finance, are heading into 2012 having enacted policies that expand it.

The extension of the payroll tax cut signed into law last week will for the first time divert funds directly from Fannie Mae and Freddie Mac, the two mortgage-finance companies under U.S. conservatorship, to pay for general government expenses.

That move came after two others that also could increase government involvement: Lawmakers allowed a tax break on private mortgage insurance to expire and raised loan limits for mortgages insured by the Federal Housing Administration.

Advocates of private mortgage finance say they are concerned that using fees from Fannie Mae and Freddie Mac is setting a precedent that will keep the government in the mortgage business for a decade or more.

"The goal was, at the beginning of the year, how do we wind these down?" said Edward Pinto, a resident fellow at the American Enterprise Institute, a Washington-based research organization that favors limited government. "And at the end of the year we have further entrenched them and made it more difficult to wind them down, which is classic Washington."

On Thursday, the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, directed them to increase fees on new mortgages by an average of 10 basis points, or 0.1 percentage point, effective April 1, to comply with the law.

"The average guarantee fees charged in 2012 need to be at least 10 basis points greater than the average guarantee fees charged in 2011," with the additional revenue remitted to the U.S. Treasury Department, the FHFA's acting director, Edward J. DeMarco, said in a written statement.

Currently, Fannie Mae, Freddie Mac, and the FHA back more than 90 percent of loan originations, about double what they did during the subprime lending boom, according to Inside Mortgage Finance, a trade publication.

Earlier in the year, the Obama administration and members of Congress outlined plans to reverse that trend.

In February, Treasury Secretary Timothy Geithner released three options for reducing government's role in housing finance. Shortly afterward, Republicans introduced bills to wind down Fannie Mae and Freddie Mac, which have cost taxpayers about $153 billion since 2008 because of defaults on loans they guaranteed. The legislation never advanced because there was no agreement even within the Republican caucus on the best way to proceed.

This month, in a search to find about $36 billion to finance the two-month payroll tax cut, Congress ordered a decade-long increase in the premiums Fannie Mae and Freddie Mac charge lenders to guarantee principal and interest on home loans. Lenders typically pass on the cost of the premiums, known as guarantee fees, or "g fees," to borrowers as higher interest rates.

The move is drawing criticism: It relies on long-term revenue from entities both Democrats and Republicans want to shrink, and the money won't be spent to offset the risk of loan defaults.

"In effect, this is a tax on Fannie and Freddie mortgages," said Bert Ely, a banking consultant in Alexandria, Va. "When you go to privatize or take any action to wind them down, you have a budget effect that you didn't have before."

Said Joe Pigg, vice president of mortgage finance at the American Bankers Association, an industry trade group in Washington: "It seems to be an inherent contradiction counting on revenue from a 10-year increase in guarantee fees from agencies that might not be around in 10 years."

Housing analysts say they are concerned that lawmakers will start looking to the government-sponsored enterprises as sources of funds for purposes unrelated to housing.

"Using the g fees as a funding source for general revenues sets a bad precedent for how you're going to raise revenues," said Ethan Handelman, vice president for policy and advocacy at the National Housing Conference, which advocates for government policies that support affordable housing.