My friends know that 99% of the time I am a gentle soul. The other day was one of those moments when the 1% comes out. The latest “compromise” to extend the president’s payroll tax cut is super crazy. Or, as Mitt Romney described Newt Gingrich, “zany.”
The Congress hit a new high on the gridlock scale on how best to fund the extension. First, the GOP controlled House of Representatives passed legislation that would extend the payroll tax cut one year. However, Speaker Boehner and his crew did so by attaching a host of unrelated initiatives, including the 1700 mile Keystone pipeline. This project is delayed until early 2013 because of environmental concerns. Yet the House GOP claims Keystone is a jobs creator. Don’t we need jobs now?
The Democratic controlled Senate tried and failed to pass both Democratic and Republican initiatives to extend the tax cuts. Then the Senate reached a “compromise” to extend the payroll tax cut by two months at a cost of $40 billion. The House, in repudiation of John Boehner’s Speakership, first voted down and then accepted the Senate compromise. The Keystone pipeline was thrown back on the desk of the president for a yea or nay decision. The Senate legislation offsets the two month tax cut by raising the guarantee fees banks pay Fannie Mae and Freddie Mac.
This is the point where I lose my reasonableness. It is embarrassing that the Senate could only pass a two month extension. A short-term solution, coupled with increasing the costs of getting a mortgage, is a complete failure of leadership. Every Senator let down the citizens who elected them and pay their salary. More importantly, the battle will begin anew with an uncertain outcome.
The payroll tax cut is fundamentally a middle class issue. Median income in the United States is less than $50,000 and falling. Poverty affects nearly one in two Americans. Every extra dollar a family receives means the world. Extending the tax cut only two months is a real kick in the balls.
Using the guarantee fees Fannie and Freddie charge banks is robbing Peter to pay Paul. Raising the guarantee fees will hurt the housing market at a time when little flickers of life are starting to appear.
Let’s take a closer look at the impact of higher guarantee fees. Senate staff claims that increasing the guarantee fees banks pay the mortgage giants will “only” raise consumers’ housing payments by about $15 a month. Let’s set aside the fact that this translates into an extra $180 per year and $5,400 over the life of a 30 year loan. Thank God inflation is low for now. And what if loan applications fail to bring in the desired revenue?
Before the Senate initiative, risk-based charges consumers paid were already high. When applying for a mortgage, fees or points are charged to address the risks posed by an applicant’s credit scores, the value of a home relative to the amount of money borrowed, and/or the type of refinance (cash out or rate and term). These costs are in addition to those paid to buy down interest rates.
The exact amount the guarantee fees increase is probably less than one percentage point. However, even a half a point on a $200,000 mortgage translates into an extra $1,000, offsetting the benefit of the tax cut. Moreover, homeowners may have to pay these fees well beyond the one year extension of the payroll tax cut.
Perhaps the House Republicans have handed middle America an unintended holiday gift. The pause in passing the payroll tax cut extension for one year may give cooler heads a better way to fund the program.
The only common sense solution is to ask those who earn over a $1 million to make a small contribution in a time of greatest need. Can’t we think of creative ways to reward the wealthy for stepping up to the plate?
If I were in the one percent, I would gladly pay a little extra so all will benefit. Senate and House Republicans are opposed to anything that requires the very wealthy to make any sacrifice. They refuse to even ask the question as the answer may sorely disappoint. Leaders in the House and Senate need to set a timeline to pass the extension. The Congress does not come back into session until January 25, 2012, a little over a month before the two month compromise expires.
Without leadership in the Congress, America, in the end, will be left with a pipeline to nowhere.
I have to augment my previous comment. It’s not $1 billion in funded mortgages in two months, but rather nearly 1 billion in mortgage applications have to be funded. No way this is happening. Plus the current denial rate of mortgage applications is between 35-40 percent.
If I may leave a comment to further a good discussion. It is estimated that roughly $1 billion of funded mortgages will be required to fund the tax cut extension. I think it has to be higher. More importantly, it takes time to approve and fund mortgages. An application taken on January 3, 2012 will likely not be approved and funded until the second week in Febuary. Purchase applications are further delayed because homes have to sell first and/or applicants may not qualify. The bottom line is I fear the Congress will be forced to extend the higher guarantee fees paid to Fannie and Freddie and potentially try to find the offsets from another middle class program.