The mortgage industry is pushing Congress to split off part of the Biden government’s corporate tax plan, warning that a tax hike for the largest lenders in the form of higher mortgage rates and fees would trickle down on borrowers.
President Joe Biden’s proposals include a minimum 15% tax on book income that companies publicly report to investors in their annual financial statements before tax. Book tax is aimed at very large corporations that will generate little or no taxable income in a few years.
The Treasury Department projected the book tax would only hit about 120 companies with annual book revenues of $ 2 billion or more. Some tax experts say the financial institutions that would pay them are so large that they would likely have a limited impact on borrowers and small lenders.
However, lenders warn that the unique landscape of the mortgage market – where smaller lenders make loans and then sell them to much larger financial institutions that service the loans – could be inadvertently damaged by a book tax. Your message to The Hill: An industry-specific mortgage service exemption is needed to protect lenders and borrowers who they say are not the targets of the government proposal.
Scott Flaherty, CEO of Minnesota-based Lend Smart Mortgage LLC, said big lenders won’t be deterred by higher taxes – they would pass them on to homebuyers through higher interest rates and fees, hurting first-time buyers and borrowers who can. t afford the additional cost.
“Oddly enough, in my opinion, the little guy is the person who gets hurt the most,” said Flaherty.
Industry warning
The mortgage industry is generally divided into two parts: origination and servicing. Origination is the process of underwriting the loan while servicing is an interface with the borrower to collect payments.
To reduce the risk of their balance sheet, originators can sell loans on the secondary market to companies like Fannie Mae, Freddie Mac, or a major bank. The company servicing the loan generates book income that is reported to investors, but the company has no taxable income until borrowers repay it, usually in monthly installments.
Industry players argue that any pressures on profits – including imposing a book tax – would make it harder to sell mortgages, making it harder for lenders to keep getting new loans in the highly competitive housing market.
New loans rose nearly 19% between March 2020 and 2021, creating a flurry of new mortgages in the secondary market, according to data from mortgage data technology company Black Knight Inc.
This surge in demand is being driven by two main drivers, demographics and historically low interest rates, said Andrew Reading, a home construction analyst with Bloomberg Intelligence.
“This is really what drives the markets,” Reading said, noting that low interest rates “are the only thing that really keeps affordability in check”.
Average home prices rose 9% from April to October last year, according to the Federal Reserve Bank of St. Louis.
Reading posited that when interest rates rise, the 4% threshold is where buyers in the current market could experience a “sticker shock”, potentially reducing demand.
The average 30-year fixed-rate mortgage rate is still near historic lows at 2.78% on Thursday, according to the St. Louis Fed.
Lobbying push
The increased cost of servicing mortgages could also create volatility in the market that would hurt smaller lenders, said Bill Killmer, senior vice president of legislative and policy affairs for the Mortgage Bankers Association.
The “cleanest way” to address these potential consequences is to exempt mortgage lenders and other similar businesses that may be subject to minimum book tax, Killmer said.
However, critics argue that the basket of companies the proposal is intended to affect is so massive that it would dilute costs in the organization’s other businesses, with little or no impact on the mortgage loans.
Thomas O’Rourke, tax partner at California-based accounting and advisory firm Haskell & White, said the proposed tax is unlikely to have much of an impact on mortgage lenders as the tax would be collected when the loan is repaid – and mortgages are usually in monthly installments paid.
“I don’t see it as detrimental as the mortgage lenders say,” said O’Rourke.
“I’m not a fan of paying taxes, but if they pay their degrees, in theory, it’s not the companies who can get away with not paying,” O’Rourke said, referring to smaller mortgage lenders.
Negotiations are ongoing
The Mortgage Bankers Association said it was in talks with lawmakers on the hill, including Senate Finance Chairman Ron Wyden (D-Ore.) And House Ways and Means Chairman Richard Neal (D-Mass.) .
Wyden’s office declined to comment on the story. Wyden has been working on other changes to tax law that could be options for a large economic package, including limits on deduction for run-through businesses and changes in taxation on unrealized capital gains.
The maneuver comes as the White House works on a two-pronged plan to move Biden’s tax and spending agenda forward. A tentative bipartisan deal is flowing as Democrats work out the details of a $ 3.5 trillion package to be pushed through the budget reconciliation process, a tool that would avoid a Senate filibuster.
Lisa Zarlenga, partner at Steptoe & Johnson LLP and a former Treasury Department tax attorney, said book tax is facing a high bar in resolving a narrowly divided Congress.
The proposal would likely impact several industries, Zarlenga said, particularly energy, airlines and other sectors that benefit from accelerated depreciation. There are also many unanswered questions about how the book tax would work in practice, she said.
“I think it’s going to run into some hurdles because of that,” she said.
—With the support of Kaustuv Basu.