Professionals in the mortgage industry just discovered an obscure provision in the Senate’s tax bill. The provision would change the time at which lenders pay taxes on income from servicing mortgages. The change could cost banks billions and drive smaller and non-bank lenders out of the mortgage business, writes Joe Light at Bloomberg.
- Senate tax bill has obscure provision with big consequences for mortgage servicing
- Provision would require lenders to pay taxes on mortgage servicing upfront, based on total projected income
- MBA president David Stevens believes it would cause significant disruption in the industry
- Lenders are worried there may be more unnoticed negative provisions
Over the weekend, staffers at the Mortgage Bankers Association apparently discovered an obscure provision in the Senate’s tax reform. The provision would require lenders to pay taxes on mortgage servicing upfront, rather than when they receive payments. Some smaller and non-bank lenders that may not have the wherewithal to pay upfront could be pushed to exit the mortgage business.
“It’s a fire drill,” said MBA president David Stevens. “We’re scrambling to get people on phone calls. It would cause a significant disruption in the industry.” That’s because cash from mortgage servicing can take years, but under the new provision lenders would need to pay taxes on the entire projected income from the servicing upfront.
The change would result in a $1 million increase in taxable income this year for Texas-based non-bank lender Georgetown Mortgage. The company’s CFO, Michael Jones, told Bloomberg that the cash from mortgage servicing typically comes in over a five or six-year period, so being taxed upfront is a huge problem.
Others are worried there may be more unnoticed provisions with negative consequences in the Senate bill. Glen Corso, head of a small-lender trade, said he’s worried there might be even more negative provisions, especially if the Senate if trying to rush this bill through Congress. “Something could come to light when it’s too late to do anything about it,” he told Bloomberg. “We could have a law of unintended consequences.”