Provision in Senate tax bill could cost banks billions

WASHINGTON — 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 today or Friday. Julia Lawless, a Senate Finance Committee spokeswoman, didn’t have an immediate comment on the provision.

For lenders, the issue surrounds a central way they make money. When a borrower takes out a loan, lenders often sell that loan to governmentbacked 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.

Under current law, lenders pay tax on the servicing as the cash is received. Under the Senate bill, according to the MBA and other groups, lenders would have to pay taxes upfront, based on the projected income from the servicing. That mismatch between when the income is taxed and when it’s actually received could cause lenders that lack the wherewithal to pay upfront to abandon servicing altogether, the trade group says.

For Texas-based non-bank lender Georgetown Mortgage LLC, the change would mean about a $1 million increase in taxable income this year — even though the actual cash from servicing a typical loan comes in over five or six years — said Michael Jones, the company’s chief financial officer. Jones said Georgetown is on pace to make about 4,000 mortgages this year, mostly within Texas.

"That money coming out to pay taxes prevents people from getting raises or promotions or hiring people,” Jones said.