Biden’s tax proposal will crush the MSR market



Despite the fact that new volumes of mortgage lending for 1-4 families are falling and the industry is again turning its attention to cost management rather than growth, the market mortgage rights on fire. As refinancing applications decline, the value of monthly MSR cash flows is growing rapidly and may exceed peaks reached several years ago.

According to SitusAMC, a number of banks entered the market last month to compensate for loan outflows due to prepayment. The US banking industry experienced a significant downturn in total portfolio from 1 to 4 during 2020, as well as third party services. In the first quarter of 2021, the total 1-4 served by other US banks fell below $ 3 trillion, while non-bank service companies are approaching $ 6 trillion.

A growing crowd of banks, mortgage banks and investors looking to buy service assets have raised their estimate of over 5x the annual cash flow from the service lane – a price level that leaves many seasoned operators shaking their heads in disbelief. For example, for a typical mortgage-servicing asset, a fivefold ratio equates to a valuation of about 125 basis points. This level significantly exceeds the cost of creating an asset and the fair value of similar MSRs reported by many public companies.

Last week, for example, Ocwen Financial (NYSE: OCN) made a deal to acquire MSR Fannie Mae / Freddie Mac for $ 48.3 billion from AmeriHome Mortgage, which was acquired earlier this year from Western Alliance Bancshares (NYSE: WAL). Earlier this year, Okuen acquired service assets from Texas Capital Bank.

Ocwen subsidiary PHH will pay approximately $ 600 million in common service assets, as well as $ 48 billion in outstanding principal balances for 1-4 households. Dividing the remuneration by UPB gives an estimate of the acquired MSRs of about 125 bp. or exactly 5x the annual service income. It should be noted that Western Alliance is financing the purchase, so the most successful bank exchanges the supposedly inflated MSR for a financial asset.

However, the favorable environment in the MSR market may not last long. The Biden administration has proposed a new alternative minimum tax structure by balance sheet income. Biden’s tax proposal could negatively affect the value of independent mortgage banks, the MSR market and seriously reduce the value of servicing assets owned by banks, non-banks and investors.

During the 2020 campaign, then-candidate Biden proposed an alternative minimum tax of 15% on accounting income for companies with net profits of $ 100 million or more. The latter proposal was revised by incumbent President Biden when the tax components of the Made in America proposal were released. The latest proposal regulates the AMT threshold for companies with net profit of $ 2 billion or more.

AMT will require some companies to re-calculate the tax on balance sheet profits and pay a minimum tax of 15% even on assets and businesses that have not yet generated taxable income in monetary terms. This calculation will ignore previous losses, so even companies with large net operating losses will have to pay a minimum tax.

During the 2017 tax cut debate in Congress, a proposal was put forward that would eliminate tax exemptions for MSRs that generate income over time. Biden’s tax proposal would tax MSR on the sale of a mortgage note, forcing mortgage lenders to pay taxes on income they have not yet received. The negative impact on the value of existing and future MSRs owned by both banks and non-banks can be catastrophic.

“During the debate on the bill, concerns arose in the industry regarding a provision that would remove tax deferral in the creation of mortgage servicing rights,” wrote Mike Fratantoni of the Mortgage Bankers Association in a recent column.

“MSRs are recorded as a balance sheet asset when loans are sold in the secondary market and are recorded as balance sheet gain at that time,” writes Fratantoni. “However, if the service is maintained, the lender does not receive any cash income when the MSR is created. The tax deferral in the current code recognizes this difference between accounting and tax income, as well as the taxation of service income over time as cash is received. “

Biden’s tax proposal for a corporate AMT is part of a broader democratic attack on home ownership, which includes raising taxes on capital gains as well as ending 1,031 exchanges to sell property. I described the impact of these proposed changes on family farms and small home investors in a recent blog post for Institutional Risk Analyst

President Biden is pushing for a tax hike on real estate transactions with profits of more than $ 500,000, a goal aimed directly at the hearts of small real estate investors, family farmers and owner-occupied businesses. Combined with his plans to remove the rationale for higher levels of property ownership, Biden’s tax proposal will significantly increase the value of agricultural land and thus food prices, property prices and rental prices in some markets.

AMT will have a unique and negative impact on mortgage lenders and service companies, especially IMB. A negative approach to MSR under the AMT will force IMB to sell most of its servicing assets when the mortgage bills are sold to investors in the bond market. Since IMBs are large and long-term holders of MSRs and today serve two-thirds of all mortgages for 1-4 families, Biden’s AMT could negatively affect the availability of credit for all consumers. Indeed, this is precisely the purpose of Biden’s cynical and deliberate attack on the American dream of home ownership.

One issuer told National Mortgage News that AMT could accelerate tax risks for banks and IMBs and change the attitude of service companies and investors towards large positions in MSR. An ill-conceived proposal by the Biden administration could lead to lower mortgage volumes, higher costs for borrowers and lower availability of credit, and possibly even a forced sale of servicing assets.

Since commercial banks obviously want nothing to do with mortgage servicing assets, largely due to specific advice from federal banking regulators, who would want to own MSR if not IMB and large buyers? This is the question that the Biden administration must answer.

Meanwhile, representatives of the residential mortgage industry must mobilize immediately to destroy Biden’s AMT proposal and protect consumers and the mortgage sector from this unwarranted attack on homeowners.


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