Go Long the Former GSEs?
Some of us have been predicting for three years that Congress—because it has no real mortgage finance alternatives—would keep Fannie Mae and Freddie Mac in place, despite all of the GOP anger, anguish, and verbal posturing to “get, destroy, or abolish” the two mortgage giants.
But this week our prediction got new legs—and lengthy ones at that—when word leaked about how a new extension of a lower payroll tax might be funded. (See Pennsylvania Democrat Senator Bob Casey’s payroll tax revenue explanation.)
Casey said because of lengthy bipartisan discussions on the utility a new Fannie and Freddie fee--going back to the failed Select Committee on the Deficit--both D’s and R’s want to stick Fannie and Freddie with mandated higher “guarantee fees” to cover lost Treasury revenue caused by extending the current low payroll tax.
Late political developments have the GOP opposing Casey’s plan—which was blessed by the White House and Majority leader Sen. Harry Reid (D-Nev), but not over the Fannie/Freddie fee but because the scheme still has a minuscule tax on those making over a million dollars a year.
But, IMO, any agreement will keep the new F&F fees.
The “G fee” is the price lenders pay F&F for their mortgage backed securities (bonds) guarantee of the “ timely payment of principal and interest” on bonds created from mortgage loans the lenders make) as part of providing revenue that will be lost by extending the much desired lower payroll tax.
The “F&F guarantee” is what allows the bonds to be easily traded in markets all over the world.
F and F Are Back
Why does this mean—in my view—that Fannie Mae and Freddie Mac have new life breathed into them? Two reasons, simply.
The Budget rules demand that all revenue proposals, whether this one or others, require a 10 year revenue projection, as well as a 10 stream of actual revenue. So, if the Congress is to pay for keeping the current lower payroll tax by having F&F charge their customers—the mortgage lenders—generating the required revenue, that device must be in place for 10 years, which means Fannie and Freddie must be in place for 10 years.
More important is the fact that if a bipartisan group of Senators and Members—as Casey has claimed--really supports utilizing this specific revenue option, it can employed to pay for whatever political wet dream any powerful Senator or Members wants covered by using this unique “tax”—and jacking it up in the future when additional revenue is needed, homeownership impact or not.
Once again, to me, this just means it’s a matter of time before the former GSEs get tapped to pick up some of the deficit slack.
Yes, friends and foes (especially you GOP taxphobes), this may be a “homeownership tax,” because it applies only to Fannie Mae and Freddie Mac, which must pass it on to their clients, mortgage lenders of all stripes, which then will pass it on to their customers, "Mr. and Mrs. would be homebuyer.”
Although many desperate-for-revenue advocates will argue that they just are forcing Fannie and Freddie, those evil twins responsible for _______ (fill in the blank), to pony up more cash to the Treasury, that revenue dog won’t hunt, except maybe in Tea Party land.
Business doesn’t work that way and—if approved for payroll tax purposes or something else--every player in the mortgage chain just will pass as much as possible onto to the next guy in queue, with the public ultimately picking up much/all of the tab for the "Fannie/Freddie fee."
But, when the “pay for” dust finally settles, any proposal successfully applied to Fannie and Freddie, surely will extend their lives for years to come.
I hope all of my buddies at AEI, CATO, and Heritage are watching this unfold.
Some investors might want to weigh “going long Fannie and Freddie” in hopes that a future Administration and Congress might just say, “The hell with it, let’s just free the bastards once and for all."
Not a bad call!!
Maloni, 12-7-2011
