Tax Cut to be Financed by Higher Mortgage Rates
In 2011 Congress voted to decrease the employees portion of the Social Security tax from 6.2% to 4.2%. This cut was set to expire, and the rate go back to the 6.2% it was before, but was a two month extension was recently signed by the president.
As part of the extension of the Payroll Tax Credit, Congress has passed the Tax Cut Continuation Act of 2011.
As part of the Act, the Federal Housing Finance Agency FHFA is directing Fannie and Freddie to increase their guarantee fee by 10bps. starting 4/1/12. As you can guess, this additional guarantee fee will be passed on to borrowers on their new mortgage. While you may think 10bps is no big deal, the truth is that 10bps is much more likely to result in a 20bps adjustment when the market is done with it.
Typically a 4.00% mortgage to your borrower gets sold to investors as part of a 3.50% security to investors. The 4.00% note rate is adjusted to reflect the servicing fee of .25% and the guarantee fee of .25% for a final return on the investment of 3.50%.
Because of how the market operates, to deliver that same 4.00% note into a 3.50% security would result in the additional 10bps guarantee fee having to be accounted for up front. It is expected that the 10bps guarantee fee will be accounted for in a 2:1 ratio. In other words, the 10bps guarantee fee will likely be accounted for in the form of an additional 20bps. This will likely cost your clients an additional .125% in rates in most cases.
While this additional guarantee fee will apply with executions to the agencies as of April 1, 2012, don’t expect your investors to wait till then to pass it on. In fact, we’ve gotten wind of some lenders implementing as early as February, 2012.