Monday Morning Cup of Coffee takes a look at news coming across the HousingWire weekend desk, with more coverage to come on bigger issues.
Tax reform. Tax reform. Tax reform.
The biggest issue facing housing and mortgage finance, by far, is tax reform. For now there is no consensus, or clear guidance, on what tax reform will entail.
In the middle of the night on Friday, the Senate passed a bill to completely overhaul the current tax system. Now, the House and the Senate will have to come to come to an agreement about which tax bill to send to the president's desk.
The House passed its tax reform bill back in the middle of November.
As a reminder, the Senate's version of the bill would keep the mortgage interest deduction intact, but would still double the standard deduction, making the MID less attractive, some experts claim. Catch up on how the Senate's bill would affect housing in our coverage here.
Odds are, Republicans will get something passed and as it looks now, the industry is firmly divided in half on whether or not this will be good for our line of work; but for vastly different reasons.
The Mortgage Bankers Association is in favor of one specific part of the reform — the addition of the so-called Rounds Amendment, which will help mortgage servicers avoid a rise in taxes.
David Stevens, CMB, President and CEO of the MBA, offered the following statement praising efforts by Senate Leadership to address this aspect:
“I want to personally thank Majority Leader McConnell, Chairman Hatch, Senator Rounds, Chairman Crapo, and Senator Perdue for working with us and commend them for their efforts on this important 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.”
“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.”
However, the lobbying giant for real estate agents, the National Association of Realtors, believes the reform puts home values at risk and dramatically undercuts the incentive to own a home.
According to a statement from NAR:
“The tax incentives to own a home are baked into the overall value of homes in every state and territory across the country. When those incentives are nullified in the way this bill provides, our estimates show that home values stand to fall by an average of more than 10 percent, and even greater in high-cost areas,” according to NAR President Elizabeth Mendenhall.
“Realtors support tax cuts when done in a fiscally responsible way; 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. 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.”
But the real issue is not just with the Senate version, but the House-passed version as well that sees bond financing for affordable housing significantly modified (in a bad way) if passed, as is.
According to coverage from Martin Braun in Bloomberg:
The House measure would eliminate a form of tax-exempt debt called private-activity bonds — and, consequently, tax credits generated by the securities — after Dec. 31, wiping out a key tool used to finance more than half of the affordable units built each year, according to the National Council of State Housing Agencies.
Braun notes that “the number of affordable rental units built nationwide over the next decade may be reduced by as much as 880,000, according to an estimate by Novogradac & Company, an accounting and consulting firm specializing in real estate.”
In a statement, Novogradac urges the House and Senate to retain the tax exemption of private activity bonds.
Black Knight Data & Analytics Executive Vice President Ben Graboske explained that, under the proposed tax reform, proposed changes to the standard deduction, mortgage interest deduction (MID) and capital gains exemptions in particular could put even more pressure on already limited available housing inventory, with ramifications for both current homeowners and prospective buyers.
“Both tax reform proposals double the standard tax deduction, which may, in many cases, provide a greater benefit to renters than to homeowners,” said Graboske. “It may also reduce the tax incentive to purchase a home and generally make the MID less valuable to borrowers. We’ve observed in the past that positive tax incentives can certainly impact home buying decisions – the Black Knight Home Price Indexs howed clear evidence of this as a result of 2008’s first-time homebuyer tax credit."
However, limited data is available to examine the effects of removing an existing tax incentive on borrowers’ purchase behavior.
Graboske went one step further to say that a reduction of the MID could further constrain available housing inventory, which itself has helped to push home prices even higher in many places.
"Almost 3 million active first-lien mortgages — current mortgage holders — have original balances exceeding $500K — the cap proposed in the House version of the tax bill. These borrowers would be exempt from the limit. We’ve already seen signs of ‘interest rate lock’ on the market, as homeowners with low interest rate mortgages have a disincentive to sell in a rising rate environment. The question now becomes whether the proposed tax reform adds another layer of ‘tax deduction lock’ on the market. Do these homeowners now also have a disincentive to sell their home in order to keep their current interest rate deduction of up to $1 million? If so, this would potentially add new supply constraints."
We’ll keep a close eye on it.