When you read about the tax cut bill in the newspapers, you learn mostly about the big picture issues. Should there be tax credits for children? What tax should there be on capital gains?

But under the surface, dozens of private companies are angling to get or preserve special tax advantages. Often, they win usually by promoting their deal as a public service.

But if taxpayers are going to subsidize something, it should be discussed directly. It shouldn't be tolerated as a loophole that hands tens of millions of dollars in tax breaks to a particular corporation.

Which brings us to the question: Should a loophole be allowed for a mortgage insurance program developed by Fannie Mae, a private but government-favored corporation that supplies money to the mortgage market?

Fannie Mae buys home mortgages from banks and other lenders. Its operations are backed by a government guarantee that lets it raise funds at a low rate of interest.

In the "good works" part of Fannie's proposed program, it would offer a package of credit insurance to first-time homeowners whose loans it buys.

This coverage would pay your mortgage for three months if you lost your job or became disabled. If you died while holding the mortgage, a life insurance policy would pay it off.

For tax purposes, this insurance package is considered a form of taxable income. If you took the coverage, you'd pay a modest tax each year perhaps $50 or $100, Fannie says.

Fannie would keep the life insurance going for as long as you lived. You'd owe the tax for the mortgage's full term say, 15 or 30 years even if you moved and repaid the loan ahead of time.

If you died within that term, your heirs would get 75 percent of the loan's amortized balance.

Fannie would get the remaining 25 percent plus all the proceeds from policies on people who died after the mortgage's full term but only up to a "reasonable" return on costs, says Fannie Mae Senior Vice President Adolfo Marzol. Any excess would go the policyholder's estate.

What's wrong with this picture? Fannie Mae isn't really paying for the policy. American taxpayers are paying and giving Fannie a profit, besides.

The congressional tax-writing committees think that Fannie Mae, together with other corporations that might copy this scheme, could cost taxpayers $2.2 billion over 10 years.


For reprint and licensing requests for this article, CLICK HERE.