The Wall Street Journal reported earlier this week that Congress is considering raising the fees that Fannie Mae and Freddie Mac collect from lenders (and lenders, of course, pass along to the borrower) as a means of paying for an extension of the payroll tax reduction. Payroll taxes for FICA will automatically revert to 6.2% on January 1 unless Congress votes to extend them.  This tax was reduced to 4.2% in 2010. If Congress allows this tax reduction to expire, the average employee will pay an additional $1,000 – $2,000 per year.

This proposal to pay for the extension of the payroll tax reduction is, once again, putting the burden on the backs of the middle class. Remember, FICA withholding only affects the first $106,800 of earned income. Everything over $106,800 and all passive income (capital gains, rental income, interest & dividends) are not subject to the FICA tax. So if the reduction is allowed to expire, the burden will be borne almost solely by the middle class.

Yet if Fannie and Freddie’s fees are increased in order to extend the payroll tax reduction, it will still be the middle class paying the price. Fannie Mae and Freddie Mac are quasi-private “Government-Sponsored Enterprises (GSEs)” that provide about 80% of the secondary market for buying conventional conforming loans. The conforming loan limit is currently $417,000 which is (coincidentally?) roughly the same amount a borrower earning $106,800 per year with a 10% downpayment would qualify for. Those earning more than $106,800 don’t pay FICA on anything over that ceiling. Likewise, they are more likely to be purchasing homes with jumbo loans (over $417,000) which will not be subject to the Fannie/Freddie fee increase.

Now I realize that people don’t buy a house every year whereas they do need to make an annual salary, but in a real estate market that is already difficult for the average home buyer thanks to strict loan requirements and fierce competition from cash investors, I just don’t see the sense in adding to the burden. Congress needs to find another way to pay for the extension of the payroll tax reduction.