Monday, January 16, 2012

Joe the Small Business Owner: Where's Obama Getting Money for Payroll Tax Holiday? Your Mortgage.

*Editor's note: I recently asked Joe the Small Business Owner to explain how President Obama's payroll tax holiday will be paid for. New homeowners will be paying for it. The housing market is in a depression now. Obama's move to heap on home buyers the cost of the payroll tax holiday reminds me of those who send a box of kittens down the river because they can't afford them and are too lazy to solve the problem of finding them homes.


80 Basis points means that for every one hundred thousand dollars of money borrower your fees just increased by 800.00. [T]his is a convoluted attempt to make it look like the consumers got a tax break. [It] in all likelihood is going to make the economic recovery last longer, as it directly will slow down real estate, by making financing more expensive, or making less people qualified to purchase homes. [T]his is a sneaky, not well thought out attempt at redistribution of wealth, at the expense of housing industry.

Dear Victoria:
You had asked me to explain the recent payroll tax extension signed into law, and the effect of the rise in rates in mortgage costs.  Basically what was done here is the government extended the social security/Medicaid payroll tax rate for individuals.  Now remember companies have always matched the employee/w2 contribution.  The company rate of course was not cut, only the part the employee w2 wage earner pays. 


 
So that is good news. It gives each w2 wage earner which can include some corporate owners if they pay themselves on a w2 a small tax holiday (two months).
Now the bad news:  Behind the scenes what the Government did is tell the GSE's (see explanation below) that they are going to have to pay 10% of their guarantor fees to the United States Treasury. 

What that actually means as we have seen in the mortgage industry is a rise of points on each loan of anywhere from 50 to 80 basis points.  On any loan that is going to be delivered to the GSE's after April first.  Loans being originated today, that are going to be delivered on or after that day are having increases to offset the additional cost of GSE fees. In effect this raise of cost of doing business was and is being immediately transferred to the consumer through the higher cost of borrowing.  Now all these terms and basis points and language tend to confuse the consumer, so let's put it in quantifiable dollar cost.  80 Basis points means that for every one hundred thousand dollars of money borrower your fees just increased by 800.00.


As far as we can tell it looks like this additional cost is for a ten year period of time.

That's pretty significant when you look at the shape housing is in. Raising the cost to do business and the cost of financing is going to effectively mean fewer people are now qualified. 
 
If you do not have the cash to pay for the increased cost, you can take a higher rate. Higher rates equal less qualified borrowers. Remember today's underwriting standards are about as tight as they have been in years. For the most part, if a borrower exceeds a total debt-to-gross income ratio of 45%--no matter what --the GSE's underwriting engines will not approve a file. No matter what kind of additional other risk mitigation factors are involved…i.e. loan to value, credit score, cash, etc.
So in summary, this is a convoluted attempt to make it look like the consumers got a tax break. Behind the door is a huge cost increase of doing business for the housing industry.  Also from our understanding the GSE's do not get to keep this money, but must pass it on to treasury, so none of this is directly going to fund the multi-billion dollar losses at the GSE's. 

In fact it could actually cause them to have more losses if it affects value and qualifying significantly as foreclosures and delinquencies could again increase.  Remember higher costs mean less buyers, less sales, mean price competition, and could possibly further erode value.
It is good from the standpoint that someone is starting to pay attention to the deficits, however, this is nothing but a back door tax increase to home buying/refinancing public, and in all likelihood is going to make the economic recovery last longer, as it directly will slow down real estate, by making financing more expensive, or making less people qualified to purchase homes. 
The key to any long lasting vibrant AMERICAN ECONOMIC Recovery is for real estate to get HEALTHY.  Less borrowers means more valuation issues. 

In summary my conclusion is this is a sneaky, not well thought out attempt at redistribution of wealth, at the expense of housing industry.  Remember in business all costs are eventually passed on to the consumer.  Businesses manage margins.  If the administration had a business background and embraced capitalism, they would know what we just told them here.  Assuming they care.   

EDITOR'S NOTE: Joe-the-Small-Business-Owner is a longtime banker in the Portland area. I keep his identity secret because we know what happens to conservative businessmen around here when they tell the truth about things. 


**A government-sponsored enterprise (GSE) is a financial services corporation created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors: agriculture, home finance and education. Congress created the first GSE in 1916 with the creation of the Farm Credit System; it initiated GSEs in the home finance segment of the economy with the creation of the Federal Home Loan Banks in 1932; and it targeted education when it chartered Sallie Mae in 1972 (although Congress allowed Sallie Mae to relinquish its government sponsorship and become a fully private institution via legislation in 1995). The residential mortgage borrowing segment is by far the largest of the borrowing segments in which the GSEs operate. GSEs hold or pool approximately $5 trillion worth of mortgages.[1][2][3]
behind the scenes is tell the GSE's

1 comment:

  1. Joe

    Not only does this elevate the cost to residential borrowers, but it also undermines the purpose of the guarantee and the increases systemic risk. Guarantee fees were expressly designed to build reserves against future loan losses. By using such fees for payroll tax cuts rather than to help Fannie Mae and Freddie Mac build reserves and mitigate their risk, the Obama Administration further reinforces the dependence of the former GSE's on the taxpayers to provide additional capital to keep the failed enterprises running.

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