The mortgage industry is panicking over a provision in the Senate tax bill that some analysts and trade groups say may drive small lenders out of the business.
The Mortgage Bankers Association and other bank and mortgage trade groups scrambled over Thanksgiving weekend after staff members discovered a provision in the bill that would change the time at which lenders pay taxes on the streams of income they earn from managing borrowers’ mortgages.
That change could cost banks tens of billions of dollars as the value of those income streams drops. The reduction would be enough to drive smaller lenders and non-bank lenders to either exit the mortgage market altogether or restructure their businesses, said MBA president David Stevens.
“It’s a fire drill,” Stevens said. “We’re scrambling to get people on phone calls. It would cause a significant disruption in the industry.”
It’s unclear whether Senate tax writers intentionally targeted lenders—or whether they intend to leave the provision in place. The episode may reflect the unusual speed with which the Senate is trying to approve legislation that was introduced in written form only nine days ago. Senate leaders plan to vote on the bill Thursday or Friday.
“As Congress continues to debate the Senate’s tax reform plan that was reported out of the Finance Committee, Chairman Hatch will work with members to make the appropriate policy decisions to help deliver a comprehensive tax overhaul that will grow the economy, boost job creation, and increase paychecks for the American people,” Julia Lawless, a Senate Finance Committee spokeswoman, said in an email.
For lenders, the issue surrounds a central way they make money. When a borrower takes out a loan, lenders often sell that loan to government-backed companies, while keeping the right to collect borrower payments and manage the loan. Those so-called mortgage servicing rights are a valuable asset, and lenders often sell them to each other or to outside investors such as hedge funds when they want cash.
Timing Mismatch
Under current law, lenders pay tax on the servicing as the cash is received. Under the Senate bill, according to the MBA and other groups, lenders would have to pay taxes upfront, based on the projected income from the servicing. That mismatch between when the income is taxed and when it’s actually received could cause lenders that lack the wherewithal to pay upfront to abandon servicing altogether, the trade group says.
For Texas-based non-bank lender Georgetown Mortgage LLC, the change would mean about a $1 million increase in taxable income this year—even though the actual cash from servicing a typical loan comes in over five or six years—said Michael Jones, the company’s chief financial officer. Jones said Georgetown is on pace to make about 4,000 mortgages this year, mostly within Texas.
“That money coming out to pay taxes prevents people from getting raises or promotions or hiring people,” Jones said.
The provision, which doesn’t mention mortgages and also affects similar assets, didn’t hit the radar of many in the mortgage industry until Friday, when Stevens said it was noticed by MBA employees. He said White House officials they initially contacted didn’t seem to be aware of the issue.
‘Unintended Consequences’
Glen Corso, who heads the Community Mortgage Lenders of America, said his small-lender trade group didn’t find out about the provision until Tuesday morning. Corso said he’s worried that there might be other unnoticed negative provisions in the bills racing through Congress “especially based on this experience.”
“Something could come to light when it’s too late to do anything about it,” Corso said. “We could have a law of unintended consequences.”
Cowen & Co. analyst Jaret Seiberg said in a research note on Wednesday that the bill’s impact on mortgage servicing appeared unintentional. “We just don’t see why any senator would look to intentionally use tax policy to drive up the cost of mortgages or make housing finance less available,” wrote Seiberg, who added that if the provision stayed, the firm’s views would get “much more negative” on the housing and mortgage markets.
Both Corso and Stevens said their members were reaching out to members of Congress to get the issue addressed, making the case that the hit would flow through to mortgage borrowers in the form of higher mortgage costs.
Some housing industry groups had already slammed the tax bills in Congress for lessening the value of mortgage-related tax breaks for homeowners, which could reduce their leverage to change the provision.
