Robbing Peter to Pay Paul: US Economy Edition

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.