Is Congress planning to charge you mortgage insurance even if you put 20 percent down?

ForeclosureBy Robert Romano

Senate Democrats and Republicans on the Senate Banking Committee have agreed in principle on a plan to unwind the nearly $5 trillion Government Sponsored Enterprises (GSEs) and to, they say, “create a mortgage insurance fund for the system to protect taxpayers against future bailouts.”

Under the proposal, S. 1217, supported by the Obama administration, lending institutions will be required to pay 10 percent equity up front, and pay into the mortgage insurance pool on top of that — a cost that will undoubtedly be passed along to borrowers.

So, right off the bat, members of Congress are implicitly stating that even if a borrower puts 20 percent down on a house, that will not necessarily absolve them from paying some type of private mortgage insurance. Currently, only conventional mortgages with a loan-to-value ratio greater than 80 percent, such as FHA and VA loans but also other types, require the insurance.

By implication, that will now change with the new mortgage insurance fund being envisioned. This, in addition to the 10 percent private equity requirement, is the price to be paid for getting government out of the business of housing finance, and taxpayers off the hook for any future bailouts.

Or so say the backers of the proposal. Ranking member Sen. Mike Crapo (R-Idaho) promised the new deal would “move us toward a stronger housing system that provides a balance between providing broad access to mortgages while protecting taxpayers from losses.”

The bill would create a new government entity to replace the Federal Housing Finance Agency and to administer the insurance fund, the Federal Mortgage Insurance Corporation (FMIC). It would be required to levy fees on lenders such that after five years, the fund contains 1.25 percent of the principal of loans guaranteed by. That number jumps to 2.5 percent after 10 years.

Let’s assume for simplicity’s sake that all $5 trillion of the Fannie and Freddie loans are eventually sold off and rebundled as FMIC securities. Banks — awash with $2.5 trillion of excess reserves thanks to the Federal Reserve’s quantitative easing — would need to maintain $500 billion of equity to hold the mortgage paper.

In addition, after five years, the FMIC insurance fund would need to raise $62.5 billion. After 10 years, that number jumps to $125 billion through the collection of the fees. According to the bill, “The Corporation shall charge and collect a fee, and may in its discretion increase or decrease such fee, in connection with any insurance provided under this title to… achieve and maintain the reserve ratio goals.”

Who will pay the $125 billion? Well, since millions with loan to value ratios greater than 80 percent must already pay private mortgage insurance, Congress must mean everyone else.

That is, those 32.6 million estimated by CoreLogic who either put 20 percent down or whose mortgages are now worth less than 80 percent loan to value.

So, even if you did the right thing and saved so you could buy your house, it sure appears that Congress wants to come in and abrogate your and everyone else’s contracts, forcing you to pay for mortgage insurance. Everyone knows the costs are going to be passed on to borrowers, one way or another.

In the least, there appears to be no exemption for existing 20 percent-equitied homeowners from paying the new mortgage insurance currently owned by Fannie Mae and Freddie Mac.

Let’s assume almost every mortgage in the nation comes under FMIC’s purview. That means to cover the $125 billion, it the burden falls on the 32.6 million equitied homeowners, they could owe an additional $3,834 on their mortgages.

Oh, there will be workarounds. For new borrowers, banks will likely find ways to roll those fees into the closing costs or interest rate. For existing homeowners, there might be an incentive to do a cash-out refi to satisfy the fee requirement. Still, one way or another, everyone will have to pay.

Even then, if we experience another big housing downturn, and investors cannot cover the $500 billion capital call, and the $125 billion insurance fund proves to be insufficient, the legislation guarantees there will be another bailout, only this time without any vote in Congress.

To wit, the bill states, “The full faith and credit of the United States is pledged to the payment of all amounts from the Mortgage Insurance Fund which may be required to be paid under any insurance provided under this title.”

So, how exactly will the bill protect taxpayers from losses? It sounds more like homeowners will pay for it first, and then if and when that doesn’t work, investors are given an explicit government guarantee — something Fannie and Freddie never had.

Robert Romano is the senior editor of Americans for Limited Government. 

This article has 15 comments
  • pduffy 12.03.2014 10:48 AM

    And WHERE in the constitution does this government derive the authority to engage in the PRIVATE MORTGAGE market? This is a fascist government that has totally taken over our lives. How can it be stopped? We are all DOOMED unless something is done to stop this machine.

  • Frances 12.03.2014 11:48 AM

    Another Federal Plan for you to “Contribute to”…This can’t end any better than all the others.

  • SmileyFace10 12.03.2014 1:02 PM

    No wonder the economy can’t get moving…it’s all the fees the government keeps tacking on to our daily life. What I’d like to know is how does another mortgage fee incent home buying? I’m already upset with the 6% realtor fee that has never been adjusted due to people having access to pretty much all the same data a real estate agent has access to. Really, the only difference an agent has over a buyer or seller is they can list the house and get you in the door to look at the house. Anyway, we don’t need more fees on real estate.

  • Amfer Ferg 12.03.2014 1:48 PM

    I remember as a newly wed in 1967 when purchasing our first home – the banker was insisting we buy mortgage insurance from them. My husband was in the insurance business and refused – they got very angry and on the defensive. To humor them, he asked for a ‘quote’….much higher than our ‘shop around’ comparing apples to apples. Hmmmm, wonder where that extra money went..

  • 19don36 12.03.2014 1:53 PM

    These are the same folks who have made all the decisions about the PO for a hundred years, AMTRAK since it’s inception, The FAA upgraded computer system, and on and on (do your own research about everything the federal government runs). Now they want to control the private mortgage insurance market. I suppose that is because Obamacare, and the various bailouts and Fast and Furious show what overwhelming successes they are!

  • pduffy 12.03.2014 2:00 PM

    Remember the AIG bailout? Well, they were the ones that had underwritten all of those sub-prime mortgages that went belly up. When the time came due to ‘pay’ for the claims, they reneged, and instead, bribed some politicians to dip their dirty little fingers into the tax-payers’ back pockets and illegally used money from the U.S. Treasury to bail them out. They were all rejoicing when they were collecting all of those ‘premiums’, but to actually pay out when the so-called mortgage insurance claims came in, they ran like cockroaches. Mortgage insurance is a scam, and always has been. It’s not insurance for you, but for the banker to get rich, and stay rich, no matter what happens to the market, and they use the ‘force of government’ to make it all happen. What a country!

  • teridavisnewman 12.03.2014 5:17 PM

    What total bullshit–and let’s NOT forget the 7.8% tax on the selling price of homes that went into effect January 1st to pay for Obamacare split between the seller and the buyer. That should help the housing market–in whatever planet these jackasses reside upon because it’s not rooted in reality. The next housing bubble is all these reverse mortgages that are government guaranteed. The banks can loan whatever they feel like on reverse mortgages because if the house isn’t worth what’s owed come sale time, the taxpayers will get stuck with that bill too!!

  • dontdoitagain 12.03.2014 9:51 PM

    Teri I sure wish you and Palin would run for president. Every time I run across your comments I want to cheer…

  • the_uglydog 13.03.2014 12:37 AM

    This should be stated in plain terms and called what it is;
    “The Federal Crash The Housing Market Program”.

  • ary 13.03.2014 4:04 AM

    Another new “tax” that is not a tax – but, like Obamacare, is a penalty to taxpayers — actually another TAX on taxpayers, by a different name.
    This will be our payment / redistribution of more of our hard earned $$ — for having allowed this incompetent white house resident Obama to “bail out” the housing market by taking our tax $$ and finding more ways to tax us, calling those TAXPAYER $$ HIS federal help, to those who could not afford to own homes, who were, on the basis of Dodd-Frank’s crooked bill, allowed by banks forced to make things “affordable” for all, “borrow” money they’d never repay. As a result, taxpayers continue to “pay” through various taxpayer funded “government” programs Obama mandates, more and more of our take home pay in TAXES, designed to give Obama the blank check he demands. Remove him, but first take his phone and take his pen…and take all his insurance and security away!

  • bob570 13.03.2014 9:08 AM

    First of all why use the term Congress when only the Senate is involved? We already know our establishment Repubs in the Senate are just as corrupt as the Demos. This idea penalizes the legitimate middle class home buyers, so the government can once again order the banks to give home loans to people who can’t really afford it.

  • rcdwltd 13.03.2014 6:19 PM

    Another grab!

  • aceofwands 21.03.2014 10:13 AM

    “Obama to “bail out” the housing…”

    He created the collapse in 94.

    The genesis for the collapse started in 1994 and by 1999 the NYT
    was issuing warnings of an impending collapse. This is when Obama and
    his law firm decided to sue Citibank in Chicago, forcing loans for
    people who on any given day would require a cosigner to buy a newspaper. In 1995 Bill Clinton thought it such a good idea, he lowered the standards even further.

    http://www.obamafordummies.com/sub-prime-mortgages.html

    ”From the perspective of many people, including me, this is
    another thrift industry growing up around us,” said Peter Wallison a
    resident fellow at the American Enterprise Institute. ”If they fail,
    the government will have to step up and bail them out the way it stepped
    up and bailed out the thrift industry.”

    http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html

    http://www.thehispanicconservative.com/General/the-fanny-mae-and-freddie-mac-debacle.html

    “(BTW: Bush asked Congress 17 times to stop Fannie & Freddie
    -starting in 2001 because it was financially risky for the US
    economy).Barney blocked it and called it a “Chicken Little Philosophy”
    (and the sky did fall!)”

    http://message.snopes.com/showthread.php?t=77592

  • Death2Unions 03.04.2014 7:41 PM

    Once again, we are witnessing America being slammed down into the basement. Hello MSA! Marxist State of America.

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