MBA Calls on Senate to Fix Tax Bill Treatment of MSRs

Mike Sorohan msorohan@mba.org

November 29, 2017

 

The Mortgage Bankers Association called on the Senate to fix a controversial provision in the Senate tax bill that would require any item of income that an accrual taxpayer recognizes for accounting purposes, including mortgage servicing rights, also be recognized for tax purposes.

A provision (Section 13221) of the tax bill reported out by the Senate Finance Committee essentially requires that any item of income that an accrual taxpayer recognizes for accounting purposes must also be recognized for tax. MBA said in effect, if such item is booked as income for the financial statement, it must be included in gross income for tax, which creates a tax expense that must be paid in cash, even if the income is not yet received in cash. This is a significant change in tax law, with particularly harsh impacts on smaller lenders.

"This provision would have severe, unintended consequences resulting in higher costs for borrowers and diminished access to credit, caused when servicers of all shapes and sizes are forced to exit the business because they can't, or won't, operate under this new rule," said MBA President and CEO David Stevens, CMB. "It would also negatively impact trillions of dollars of mortgage servicing rights held by small community banks, non-bank lenders, regional and large banks, and commercial and multifamily lenders. MBA calls on members of the Senate to address this provision without further delay, before the bill gets to the Senate floor."

MBA said under the provision, mortgage servicers would be required to pay tax on the mortgage servicing right when it is created, not when the cash is received as under current law. For an originator that retains servicing, this MSR would have a zero tax basis so the tax liability would be quite large, and would be due to the IRS at a time when the servicer has not yet received any cash for performing the servicing on the underlying mortgages.

The MBA Mortgage Action Alliance, in a Call to Action to its members, warned of potential effects if the provision were to take effect as written:

--Many independent mortgage banks could no longer service mortgages, as they would have not have the cash (liquidity) to pay the tax when it came due. They would need to either borrow money to make these payments, or more likely, decide to sell their loans with the servicing asset "released" to larger lenders, likely bank servicers or hedge funds who would have the liquidity to handle this change.

--Without the ability to accumulate a base of MSR assets on their balance sheets, IMBs that only originate loans would be subject to greater volatility, and have a more difficult time riding through the ups and downs of the mortgage market.  This change could lead to a substantial reduction in the number of small and mid-sized IMBs in the marketplace, or turn them into brokers rather than lenders (capital providers).

--Community banks would face similar pressures in funding this tax liability and may instead be forced to sell the loans to larger lenders. Although banks have greater access to liquidity, this change would be one more factor that could lead community banks to exit mortgage lending and refocus their business lines beyond mortgages.

--Larger institutions would have to alter their business models to handle this change. The current tax treatment has many banks creating substantial deferred tax liabilities. A different tax treatment could result in substantially higher capital requirements for these banks, causing them to change their business models.

--The combination of high capital standards and unfavorable tax treatment of MSRs will create a market with many sellers and few buyers, reducing MSR liquidity and forcing a downward re-pricing of the asset. This adjustment could be quite sharp and disruptive at the outset of the tax change, MBA said.

MBA also noted reduced competition in the mortgage market would ultimately be negative for consumers, as they would have fewer borrowing options, and face more frequent transfers of the servicing of their loan to servicer that may not be locally based.

"All in, this provision would substantially disrupt the existing mortgage market, with the result being diminished competition as IMBs and community banks stop servicing and potentially leave the market," said MBA Senior Vice President of Legislative and Political Affairs Bill Killmer. "More sellers, fewer buyers and tax obligations mismatched with cash flows will depress pricing for MSRs market-wide, likely leading to higher mortgage rates for consumers."

The Call to Action urged MAA members to contact their senators, urging them to oppose the provision (http://action.mba.org/mba/app/write-a-letter?0&engagementId=418774).

The Senate is expected to take up the bill as early as this week.

For more information about the Mortgage Action Alliance, visit http://action.mba.org/about2.

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