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Trump to sign tax reform into law that triggers Fannie, Freddie Treasury draw

Corporate tax rate reduction to impact deferred assets

Tax reform is done.

President Donald Trump held a celebratory conference to announce the passage of the tax reform bill into law Wednesday afternoon after the Senate voted on it early Wednesday morning, and the House revoted Wednesday afternoon. He is expected to sign the bill right after the conference. 

“Today Congress delivered tax cuts to middle-income families and a level playing field for American businesses,” U.S. Department of the Treasury Secretary Steven Mnuchin said. “I congratulate the House and Senate for passing this historic legislation, which will usher in higher wages and more jobs for American workers, a fairer system for all and greater economic growth that will lead to a brighter and more secure future for our country.”

“Thanks to the leadership of President Trump and our colleagues in Congress, hardworking Americans will keep more of their hard-earned money in 2018 and beyond,” Mnuchin said.

The new bill will bring sweeping changes to the U.S. tax system and the housing industry, notably to mortgage giants Fannie Mae and Freddie Mac.

“A reduction in corporate tax rates would require us to measure our net deferred tax asset using the new rate in the period in which the rate change is enacted, resulting in a one-time charge through the tax provision in the period the tax rate was changed,” Freddie Mac told HousingWire. “This increase in tax expense could significantly increase the risk of a draw.”

As our own Senior Financial Reporter Ben Lane reported back in early November, the now tax law will likely trigger the GSEs to make a draw from the U.S. Department of the Treasury.

The new law reduces the corporate tax rate from 35% to 21%, the first reduction to the rate in 15 years.

Now, due to that reduction, the GSEs will likely need to make a draw from the Treasury for two reasons – zero capital and the GSEs' deferred tax assets.

Under the Preferred Stock Purchase Agreements that went into effect when the government took the GSEs into conservatorship, the GSEs’ capital base is required to be reduced over time, with their capital reserves scheduled to be drawn down to $0 on Jan. 1, 2018 – the same date the new tax law will take effect.

Basically, Fannie and Freddie won’t have enough profits in that given quarter to cover the reduction in the value of their deferred tax assets, nor will they have any capital on hand to cover the losses. Click here to read more about that.

However, Fannie Mae explained that the tax reform will bring solid economic growth over the next couple years.

“We expect the tax bill to strengthen growth, though the amount of growth acceleration is a matter of significant debate among macroeconomists,” Fannie Mae Chief Economist Doug Duncan said.

"Our view is that it could add half a percent or more to annualized economic growth above baseline each of the next couple of years,” Duncan said. “If that growth comes from investment increases driving productivity gains resulting in real income growth, a patient Fed can play its part in extending the expansion.”

Unlike previous versions of the law, the mortgage interest deduction to was cut to $750,000, down from the current $1 million, but up from the House’s proposed cut to $500,000.

One selling point of the final version to the housing industry is that it kept the capital gains provision intact. This provision allows married couples filing their taxes jointly to exclude up to $500,000 in capital gains on the sale of a home, as long as they have used it as a primary residence for at least two of the last five years, while an individual can exclude up to $250,000.

The House and Senate each proposed to make this rule more strict, however neither provision made it through the final committee, and the rule will remain the same.

“The final tax reform bill is far from perfect, but it’s been greatly improved for homeowners over previous versions,” said Elizabeth Mendenhall, National Association of Realtors president.

“Realtors should be proud of the good work they did to help get us here,” Mendenhall said. “We generated over 300,000 emails to members of Congress through two calls for action and held countless in-person meetings with legislators, all of which helped shape the final product.”

But the National Association of Local Housing Finance Agencies pointed out there could be another reason to be concerned at the reduction of the corporate tax rate.

“Unlike previous versions of the legislation, important affordable housing tools including private activity bonds, the low-income housing tax credit, the New Markets Tax Credit, and the Historic Tax Credit were fully preserved in the final bill,” NALHFA Executive Director Jonathan Paine said. “The corporate tax rate will be lowered from 35% to 21%, however, which will likely cause a reduction in Housing Credit equity.”

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