Senate Passes Tax Bill–Without Damaging MSR Provision

Following marathon negotiations, substantial rewrites–and intense lobbying by the Mortgage Bankers Association–the Senate on early Saturday morning passed a sweeping $1.5 trillion tax reform bill.

The nearly 500-page H.R. 1, the Tax Cuts and Jobs Act, which the New York Times described as “an overhaul that will touch almost every corner of the United States economy,” passed by a 51-49 vote, with Sen. Bob Corker, R-Tenn., the only Republican to join all 48 Democrats/independents in opposition.

For the real estate finance industry, the bill is important not for what it includes, but for what it does not include. Section 13221 of the original bill contained a provision that drastically changed tax treatment of mortgage servicing rights. The language would have required any item of income that an accrual taxpayer recognizes for accounting purposes, including MSRs, also be recognized for tax purposes.

MBA Senior Vice President of Legislative and Political Affairs Bill Killmer said in its original iteration, the provision would “substantially disrupt the existing mortgage market, with the result being diminished competition as independent mortgage banks and community banks stop servicing and potentially leave the market. 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.”

MBA mobilized its members last week with a Mortgage Action Alliance “Call to Action” asking its 8,000 members to contact their senators in opposition of the MSR provision; more than 4,000 contact by MBA member companies resulted.

And on Capitol Hill, MBA ratcheted up its efforst. In response to MBA’s concerns, Sen. Mike Rounds, R-S.D., Senate Finance Committee Chairman Orrin Hatch, R-Utah, Senate Banking Committee Chairman Mike Crapo, R-Idaho, and Sen. David Perdue, R-Ga., offered an amendment to exempt mortgage lenders and servicers from this provision. The amendment was approved before the bill passed.

MBA President and CEO David Stevens, CMB, commended Senate Republicans for resolving the MSR issue. “Because of the Rounds Amendment, this package will protect the ability of most Americans to obtain safe, decent shelter and affordable home mortgage credit without disruption,” he said in a statement. “Had this language not been included, the change in tax accounting for MSRs would have had a devastating impact on the flow of capital that supports a robust and competitive real estate finance market, both single-and commercial/multifamily. We thank the Senate for its leadership on this issue.”

The bill also reflects other key priorities that MBA strongly supported, including preserving the business interest deduction and Section 1031 like-kind exchanges for real estate property.

For much of the week, passage of the bill–considered a “must-have” by the Trump Administration, eager for a legislative victory this year–appeared in doubt, with all Democrats opposed and not enough Republicans on board even as late as Friday. Senate Majority Leader Mitch McConnell, R-Ky., announced on Friday he had the votes for passage, following substantial rewrites aimed at getting Republicans such as Sens. Susan Collins, R-Maine, and Jeff Flake, R-Ariz., off the fence.

No Democrats expressed support for the bill; Senate Minority Leader Chuck Schumer, D-N.Y., rejected overtures from the Trump Administration and expressed concerns that Republicans were “rushing through” a 500-page bill that they had not had time to read.

The bill now goes to a joint House-Senate conference committee. The Senate bill and the House version passed earlier this fall have substantial differences that must be resolved before returning to the House and Senate for a final vote. House Speaker Paul Ryan, R-Wis., expressed confidence that the joint committee can resolve differences over the nex two weeks “so we can get a final bill to President Trump’s desk.”