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Robbing Peter to Pay Paul: US Economy Edition

posted by Adam Levitin

The Administration seems to have cut a deal to extend the payroll tax cut, which is a smart economic move in terms of trying to support demand. But it's being paid for by an increase in the "G-fee" (guarantee fee) charged by FHA and Fannie Mae and Freddie Mac on the loans they purchase. In other words, anyone refinancing or taking out a mortgage now will be subsidizing reduced payroll taxes.  The result is robbing Peter to pay Paul, which means the economic benefits from extending the payroll tax cut are going to be muted by the chill this puts on the struggling housing market.  

The argument that it will encourage homeowners to look for non-GSE/FHA loans is pretty silly and hides the foolishness of using housing to pay for payroll tax cuts. Homeowners don't choose whether they have a GSE loan or not. They choose whether to do FHA or not, but if it's not an FHA loan, the homeowner doesn't know if the loan is going to stay in the lender's portfolio, be sold to another lender, be sold to a GSE (and maybe securitized by the GSE) or be privately securitized. Raising the costs of the GSE execution might encourage more portfolio lending, but it's hard to believe that a few basis point change in GSE execution costs is going to suddenly make the private-label securitization market revive.  The problems in that market aren't just the economics--particularly of servicing--but the utter lack of trust investors have in the underwriting, documentation, and servicing. For the private-label market to revive, there will need to be a much more significant difference in execution costs between private-label and the GSEs. The increased G-fee doesn't do it. 

It's painfully apparent that this Administration doesn't have a housing policy, and that's a serious problem when housing is the anchor weighing down the economy.  Consider, on the one hand, the Administration tries to make refinancing easier via the expansion of HARP.  Then it raises the "G-fee" that Fannie Mae and Freddie Mac charge on every loan they purchase, which gets passed on the homeowner in the form of a higher mortgage rate.  (I'm not sure of the pass-through rate, but I'd guess it's pretty high.)  If the Administration is trying to fix the housing market, this sure isn't the way to do it.


i didnt think much of that payroll tax cut to begin with, since a lot of that extra spending just goes to employ chinese...

what is wrong with stimulating by investing in the future?

I also don't think the payroll tax cut should be continued. This blog's insolvency focused audience is probably a minority. It is terribly sad how much of a consensus forms around sacrificing the nation's long-term fiscal health to purchase small and transitory boosts in demand. But, of course, to a politician up for re-election, nothing in the short term is small and nothing in the long term is important.

mt, I submit to you that if Obama was primarily motivated by the opportunity to score political points, he would have pulled a George W. Bush and sent every tax payer a letter announcing a tax "refund" courtesy of the White House.

On Bush vs. Obama:

"Contrast this with the Obama tax cut in 2009. Here there was no letter and no check. This cut primarily took the form of a tax credit, delivered seamlessly and efficiently through reduced payroll tax withholding. While a far better way to deliver economic stimulus—recipients were more likely to spend it—the result was that a majority of people never even knew about the money they were receiving. Only 12 percent of voters, in one poll, knew their taxes had gone down."

- Suzanne Mettler, The Submerged State: How Invisible Government Policies Undermine American Democracy.

What's the reason of a payroll tax cut by the way? As far as I know, it is intended to give a better benefit for every employee, right? It is a sad truth that this administration doesn't have any house policy. I just hope that the administration will do something about it.

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