Under the “unintended consequences” banner analysts were quick to point out that, given the increase is scheduled for ten years, Fannie Mae and Freddie Mac are not going away any time soon unless the government comes up with the money elsewhere.

Fannie and Freddie won’t absorb this increase, nor will lenders. It’ll be passed on to borrowers.

The increased g-fee, which makes it difficult for Congress to work on efforts to shut down Fannie and Freddie, based on current rates and a $200,000 loan, will cost the agency borrower about $11 per month.

“These institutions, which have been so costly to Americans and are so necessary to the housing recovery, should not be the piggy bank for future arbitrary tax policy,” head of the Mortgage Bankers Association Dave Stevens said.

Due to their government ownership, investors still view their agency (and FHA/VA) MBS’s as safer investments than those offered by private firms.

The law allows FHFA to phase in the fee over two years.

And there’s more mortgage fees born out of this bill. The bill also will raise the annual insurance premium borrowers pay on FHA loans by one-tenth of a percent.

How about, “most people who buy homes or refinance beginning next year”?

Over the weekend the Senate added a guarantee fee increase for Ginnie Mae mortgage-backed securities to the payroll tax bill, after experiencing heavy lobbying from the MI industry which feared that a 10 basis point g-fee hike for Fannie Mae and Freddie Mac MBS would tilt the market toward FHA loans. The final bill now includes g-fee hikes for all three: Fannie, Freddie and Ginnie.

Things change by the day, but the extension of a payroll tax cut and long-term unemployment benefits, estimated to cost $33 billion, will in part be paid for by an increase in the guarantee/guarantor fee charged by the FHA, Fannie, and Freddie.

But things aren’t quite that simple in Congress, as we’ve all learned.

Rep. Scott Garrett, R-N.J., has legislation that is tied into things somehow that would require the FHFA to establish rules for a privately funded mortgage finance system, repeal the risk-retention rule under the Dodd-Frank Act, move mortgage servicing standards to the FHFA, and prohibits any regulator from requiring servicers to commit principal reductions.

Five proposals have been introduced in both the House and Senate that would assemble a future housing finance system and replace the GSEs at the same time. But as I’ve been telling folks for quite some time, don’t look for any substantive changes for another year, or more.

But can we really afford to have government always frozen until the next election? A while back one reader answered:

Continuing sitting on the sidelines is not spurring activity beyond REO’s, short sales and those that have to move. The economy cannot recover without housing, unemployment cannot recover without hiring, and consumers will not spend until the economy improves. It is a vicious circle. Someone has to make a bold step and that involves banks taking a haircut to their asset value. (How many would shed crocodile tears for institutions that have failed their customer base?) Our politicians and civil servants lack the business acumen to successfully steer us out of this and too many bad decisions were made according to political expediency. Constantly aiming recovery efforts at those under water or likely to foreclose will only be a band aid. We need to boldly go where no politician has gone before and do a blanket refinance of all borrowers who are current. Yes, all those people who WOULD spend the $200 or so dollars they would now have over each month. Yes, it will have consequences but what is the alternative … more wasted billions thrown at situation from the bottom up instead of the top down?

So check with your lender to see if your tax bill is currently due or will be due by the time you close. If so, you need to plan for that extra cash consideration. Note: first installment 2011-2012 taxes cover the period from July 1, 2011 to December 31, 2011 and are due November 1. There’s a grace period until December 10 (shown in table below) UNLESS you’re doing a refi in which case all tax liens must be settled at closing.

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California Property Tax Schedule

Meanwhile the MBA is among the industry groups calling on Congress to do no harm to the fragile housing market. It is closely watching the deficit-reduction super committee, which has targeted homeownership tax breaks such as the mortgage interest deduction and the capital gains exemption, Bloomberg reports. Moreover, the MBA continues to oppose efforts by regulators to impose minimum standards for mortgage borrowers, such as a 20% down payment, out of concern that such a move would not lower default rates but would prevent many home buyers from obtaining loans.

Mortgage Prepayment Stats
Mortgage prepayment speeds came out last week, and they showed a big increase. Every loan officer across the nation can tell you why: the reduction of conforming loan limits starting October 1. September was the last month where some of these high loan size borrowers, whose loans would no longer be considered conforming, could have refinanced back into an agency loan. I am sure that low rates figure in somewhere, but rates have been pretty good for quite some time. And new borrowers seem to be the only ones who can have their loans approved under recent guideline changes, so the newer loans are the ones reaping the benefits.

Rates are staying low, and many believe will go lower still, given the state of the economy. But as mortgage rates have improved, investors have increasingly become concerned about these jumps in prepayments on lower coupon, recently originated mortgages. However, due to the increase in annual FHA insurance premiums, these concerns have predominantly been restricted to Fannie and Freddie mortgage bonds. But what about prepayments on FHA & VA loans impacting Ginnie Mae securities?

A look at rate sheets show that the FHA rate being offered by originators is now 25-50 basis points lower than the conventional rate. The increase in annual insurance premiums only impacts FHA prepays. Prepayments on non-FHA loans are likely to be faster than speeds at the end of last year. Analysts point out that the impact of the net tangible benefit test fades as the loan seasons, and that in fact the most recent HUD outlook report showed that FHA-to-FHA refinancing applications jumped by 70% and that delinquencies on 2009-2010 vintage Ginnies have been increasing over the last couple of months. All of this adds up to many investors believing that FHA & VA loans will start to prepay at a faster rate. Uh oh.

IRS Summertime Tax Tip

The Internal Revenue Service has some important information to share with individuals who have sold or are about to sell their home. If you have a gain from the sale of your main home, you may qualify to exclude all or part of that gain from your income. Here are ten tips from the IRS to keep in mind when selling your home.

1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.

2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

3. You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.

4. If you can exclude all of the gain, you do not need to report the sale on your tax return.

5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.

6. You cannot deduct a loss from the sale of your main home.

7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.

8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

9. If you received the first-time homebuyer credit and within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full credit is due with the income tax return for the year the home ceased to be your principal residence, using Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. The full amount of the credit is reflected as additional tax on that year’s tax return.

10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.

More tips and links:

-IRS: 10 Tax Tips For Individuals Selling Their Home
-IRS: Selling Your Home Tax Guide

Is it more beneficial to pay cash for a home? Depends on your expected time horizon in the home, and what return you could otherwise get for that cash. Here are some things to consider. Refinancers, pay attention too: if you’re increasing your loan balance, you WON’T increase your loan interest deductions.

(1) Current rates are 4.625% for a 30yr fixed or 3% for a 5yr ARM. If you’re in a 33% tax bracket, your after-tax 30yr rate is 3.09% and your after-tax 5yr rate is 2.01%.

(2) If you financed at those rates and invested the cash, can you beat 3.09% or 2.01% investment returns after fees and taxes?

(3) If you’re paying cash with intent to finance later to take advantage of mortgage interest deductions, you have two problems:

(i) Mortgage interest deductions are limited to the IRS “acquisition debt” limit. They define deductible debt as debt taken at the time of acquiring the home. If you get a loan more than 90 days after buying the home, mortgage interest isn’t deductible.

(ii) You’d then be doing a cash-out refinance loan instead of a purchase loan. Depending on your equity position, cash-out rates can be as much as .375% higher. Also cash-out loan restrictions might prevent you from taking your desired cash amount back out.

Cash buyers (and refinancers) should think through and research this fine print with mortgage, investment, and tax advisors.

Rates also benefitted as investors concerned about Greek debt contagion sought the relative safety of U.S. mortgage bonds. Investors will continue to watch Greece closely in the next few days. Rates will likely remain even next week, but there are two things that could push rates up:

(1) If markets perceive forthcoming Greece plans as good for stability, rates could rise a bit as bonds sell and stocks rally.

(2) The Fed will end a two-day rate policy meeting with a press conference Wednesday, and while their message of near-zero overnight rates won’t change, Bernanke may issue a more firm reminder that the Fed is done buying bonds when QE2 ends June 30. If so, rates could rise a bit as mortgage bond investors take some profit.

May’s existing and new home sales are Tuesday and Thursday, and there’s not much evidence to suggest material improvements that would push rates up.

Also the third of three 1Q2011 GDP readings is due Friday which shouldn’t be too much different from the revised-down second reading of 1.8% vs. 3.1% from 4Q2010. This will be neutral to better for rates.

REIT’s are garnering much of the press in the mortgage world right now. But we have other capital market “ideas” that companies are watching. One of these is the drive to restart Wall Street’s securitization machine with instruments known as “covered bonds” which some feel will give private investors the comfort they need again. Covered bonds aren’t new, and they’re used extensively in other countries. They are pools of debt obligations that have been assembled by banks and sold to investors who receive the income generated by the assets.

The bank that issues the bonds, meanwhile, retains the credit risk. If losses arise, the bank that issued the covered bonds must offset the loss with its own capital, letting investors sleep better at night but making banks “near the edge” that much more nervous. If an asset in the pool defaults, a separate entity would be required to remove the assets from the bank’s control. The assets would then be out of reach of the FDIC should the bank fail and the agency step in as receiver. The investors who bought the covered bonds would have first call on the assets, ahead of the FDIC. Banks bypassing the FDIC? Don’t bet on that happening in the US.