A few weeks ago, I wrote an article about the minutiae of the fine print behind the Federal payroll tax cut. So many people could not understand why I was so against President Obama’s plan. As I shared that it was a tax against the American homeowner, their smiles turned to consternation as they assumed a “tell me more” posture. Once they learned about the “g-fees” that the government levies against every Fannie Mae or Freddie Mac loan originated after January 20, 2012, they weren’t touting the greatness of the Obama tax cut. These .4% fees translate into higher rates, increased fees or both for the homeowner whether they are buying or refinancing. Once the rate is locked (a 4.00% rate may now be 4.125% or 4.25% due to the g-fees) it is permanent, even though the tax cut is temporary. The initial sting is for the 90% of the borrowing public with a mortgage sold to Freddie or Fannie; now, the details are out concerning “the Lender of Last Resort” known as the FHA, and they aren’t pretty either.
It’s official now! The Federal Housing Administration has disclosed their annual premiums and upfront premiums for borrowers utilizing their programs. The annual premium for two of their programs will increase by 0.10%. This “mortgage tax” is set to kick in on April 1st. The upfront premium on all FHA loans will increase by 75% from 1.00% of the loan amount to 1.75% of the loan amount. A lot of people may say “Preston--it doesn’t matter, the upfront can get rolled in,” and while this is true, the upfront premium will be used to calculate the higher loan amount, which is then used to determine the new monthly payment (that will be higher than it would have been had the payroll tax cut not been implemented). Once the increase is calculated into the promissory note, the payment is permanent, although the tax cut was suppose to be temporary.
Now, once again, those who are able to taste the American dream, from the best of these to the least, are getting taxed. Not only are the tax cut’s benefits temporary (while the costs are permanent), but also the beneficiaries may be losing more than they gain. For example, someone who is a W-2 employee who is buying their first home with 3.5% down may save $5,000 in one year for the tax cut, but pay an additional $50,000 over the life of their new FHA loan because their rate is .25% higher (from 4.00% to 4.25%). For a person in this situation, the payroll tax cut is not a favor; instead, it’s a pain. Consequently, the only ones who conceivably benefit are those who don’t want to buy a home or don’t want to refi. Who are these people? No one that I know, because in this day and age if someone wants to buy or refi they are doing it right now (if they can). Therefore, why provide a benefit to those who don’t want to partake in the American dream? Why finance a payroll tax cut for those who don’t want to help kick start the biggest contributor to an economic recovery, such as the housing sector?
Finally, we didn’t need a tax cut. Alternatively, we need incentives to do more deals. We need incentives to put realtors, financiers, engineers, contractors, escrow companies, title officers, real estate attorneys and notaries back to work. Any tax cut that slows down the real estate market is no friend to the housing sector or our nation. Any tax cut funded off of the backs of the American dream is a tax cut that the government can keep to itself!!
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at firstname.lastname@example.org.