WASHINGTON — Lawmakers were attempting to add a fix Friday to tax reform legislation intended to avoid steep tax hikes for mortgage servicers.
A provision in the original Senate tax reform bill would have required companies acquiring mortgage servicing rights to pay taxes upfront for their anticipated servicing income, rather than when they had booked revenues. The measure was said to be intended for other purposes but it would have imposed a costly tax burden on mortgage servicers.
As Senate Republicans appeared to have the votes to pass the overall tax reform bill, lawmakers were developing an amendment — sponsored by Sen. Mike Rounds, R-S.D. — to exempt mortgage servicers from the upfront tax hikes.
“This amendment will fix the problem,” said Anne Canfield, a partner at the consultancy Michael Best Strategies and executive director of the Consumer Mortgage Coalition.
Under current law, accrual taxpayers pay taxes on income in the year that it is earned. However, the bill approved by the Senate Finance Committee would have changed the tax treatment of deferred income by requiring mortgage servicers and other companies to pay tax upfront. In the case of mortgages, that would be when the servicing right is created.
Without a fix to exempt mortgage servicers, the Senate MSR tax provision would “depress MSR values and would particularly harm smaller independent mortgage bankers,” according to Scott Olson, executive director of the Community Home Lenders Association.
Rounds’ amendment is supported by other senators, according to several sources, and the Senate was expected to vote on the measure Friday — with a vote on the overall bill expected later in the evening or over the weekend.
The legislative fix for MSRs “will no longer disincentivize banks from acquiring mortgage servicing rights and will encourage more community banks to stay in the mortgage servicing business,” said John Hand, first vice president of congressional relations at the Independent Community Bankers of America.
Tax reform has been broadly supported by banks and other financial institutions, mostly because of expected gains from a lower corporate tax rate in the plan. But potential costs for mortgage servicing rights were among the provisions that had raised concerns as tax reform has sped through the legislative process.
Another component of the original bill potentially affecting the financial services industry was that a lower corporate tax rate would force Fannie Mae and Freddie Mac to write down the value of their tax-deferred assets, exhausting their capital and potentially requiring the government-sponsored enterprises to have to seek a draw from the Treasury.
It was unclear whether changes to the bill would address the GSE issue.
Meanwhile, mortgage lenders, Realtors and homebuilders continue to be concerned about the Senate bill’s treatment of the mortgage interest deduction, according to Olson. The bill would raise the standard deduction, limiting the benefit of itemized deductions such as that for mortgage interest.
If it becomes law, fewer homeowners would benefit from the MID and it “could hurt homeownership rates and housing values,” Olson said Friday.