WASHINGTON — Lawmakers added a fix to the Senate tax reform legislation late Friday to avoid steep tax hikes for mortgage servicers.

A provision in the original Senate tax reform bill would have required companies acquiring mortgage servicing rights to pay taxes upfront for their anticipated servicing income, rather than when they had booked revenues. The measure was said to be intended for other purposes but it would have imposed a costly tax burden on mortgage servicers.

But the massive tax reform bill that passed the Senate 51-49 late in the night Friday included an amendment — sponsored by Sen. Mike Rounds, R-S.D. — to exempt mortgage servicers from the upfront tax hikes.

Sen. Mike Rounds
As Senate Republicans appeared to have the votes to pass the overall tax reform bill, lawmakers were developing an amendment — sponsored by Sen. Mike Rounds, R-S.D. — to exempt mortgage servicers from upfront tax hikes. Bloomberg News

"This amendment will fix the problem," said Anne Canfield, a partner at the consultancy Michael Best Strategies and executive director of the Consumer Mortgage Coalition.

Under current law, accrual taxpayers pay taxes on income in the year that it is earned. However, the original bill approved by the Senate Finance Committee would have changed the tax treatment of deferred income by requiring mortgage servicers and other companies to pay tax upfront. In the case of mortgages, that would be when the servicing right is created.

The original Senate MSR tax provision would “depress MSR values and would particularly harm smaller independent mortgage bankers,” according to Scott Olson, executive director of the Community Home Lenders Association.

The successful Senate passage of the tax overhaul now sets up likely negotiations with the House to develop a final version to go to President Trump's desk for his signature.

The legislative fix for MSRs “will no longer disincentivize banks from acquiring mortgage servicing rights and will encourage more community banks to stay in the mortgage servicing business,” said John Hand, first vice president of congressional relations at the Independent Community Bankers of America.

Tax reform has been broadly supported by banks and other financial institutions, mostly because of expected gains from a lower corporate tax rate in the plan. But potential costs for mortgage servicing rights were among the provisions in the original Senate bill that raised concerns as tax reform has sped through the legislative process.

"This package will protect the ability of most Americans to obtain safe, decent shelter and affordable home mortgage credit without disruption," Mortgage Bankers Association CEO David Stevens 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."

Another component of the original bill potentially affecting the financial services industry was that a lower corporate tax rate would force Fannie Mae and Freddie Mac to write down the value of their tax-deferred assets, exhausting their capital and potentially requiring the government-sponsored enterprises to have to seek a draw from the Treasury. It was unclear whether the Senate-passed bill included changes to address the GSE issue.

Meanwhile, mortgage lenders, Realtors and homebuilders continue to be concerned about the Senate bill's treatment of the mortgage interest deduction. The bill would raise the standard deduction, limiting the benefit of itemized deductions such as that for mortgage interest.

If the Senate's bill becomes law, fewer homeowners would benefit from the MID and it "could hurt homeownership rates and housing values," Olson said Friday.

After the Senate passage, the National Association of Realtors criticized the bill.

“While there are some winners in this legislation, millions of middle-class homeowners would see very limited benefits, and many will even see a tax increase," Elizabeth Mendenhall, president of the Realtor group, said in a press release. "In exchange for that, they’ll also see much or all of their home equity evaporate as $1.5 trillion is added to the national debt and piled onto the backs of their children and grandchildren."

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