Mortgage Industry Panics Over Obscure Provision in Senate Tax Bill

November 29, 2017 | Bloomberg            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.  Read more here.