First-time home buyers could pay the price for payroll tax cuts

House Republicans have revolted against the two-month payroll tax cut that passed the Senate on Saturday, offering the rationale that they want a full-year extension instead. One thing they don’t seem to be complaining about, however, is how the extension is paid for, which had been the single biggest sticking point in the debate.

(Associated Press) The Senate bill increases the fees that Fannie Mae and Freddie Mac charge for insuring mortgages, raising the rate by 0.1 percentage points. The fee hike would also apply to mortgages from the Federal Housing Administration, which focuses on first-time home buyers and lower-income Americans. Under the change, someone buying or refinancing a $200,000 house through these programs will have to pay about $17 in higher fees per month, or $204 a year, beginning on January 1, the Associated Press reports.

The mortgage fee hike would raise about $36 billion altogether, which would pay for two-month extensions of the payroll tax, unemployment insurance benefits and the Medicare “Doc Fix.” But rather than put the burden of paying for the measures on the richest Americans (as Democrats had originally proposed) or federal workers (the choice of Republicans), it punts it to home buyers linked to the politically unpopular albatrosses of Fannie and Freddie. The housing industry isn’t thrilled, arguing the move would hurt the struggling housing market. But both parties embraced the higher fees “to allow private insurers to better compete with Fannie Mae and Freddie Mac, which insure nine out of every 10 home loans made in the United States and are widely thought to undervalue loan risk,” as my colleagues Felicia Sonmez and Rosalind Helderman report.

That said, if the payroll tax is ultimately extended for a full year, it could save American households an average of $1000, including those affected by mortgage insurance rate hike. But if it’s only a two-month extension, someone buying a $200,000 home through an FHA loan could be coughing up $204 extra every year for housing insurance and saving only $163 in return through the payroll tax cut.