Mortgage servicing issue in Biden tax plan will likely be avoided: KBW

There’s an aspect of the Biden tax plan that looks worrisome for mortgage servicing rights, but analysts at Keefe, Bruyette & Woods said in a report Sunday that it’s a practical issue policymakers will likely resolve.

The proposal, which imposes a 15% alternative minimum tax on corporations with more than $2 billion in net income, could threaten a deferral that has been allowed on non-cash mortgage origination income from retained MSRs, the researchers said.

But they think the plan will likely be adjusted such that the deferral of taxes will be allowed to continue because it eliminates a logical timing issue whereby cash income from servicing would otherwise be taxed at origination, before it’s actually received. The Tax Cuts and Jobs Act in 2017 also threatened the deferral at one point, but it ultimately was left in place after industry groups like the Mortgage Bankers Association explained the concern to public officials, and the researchers think the current situation could play out in a similar fashion.

The Democratic party’s overall opposition to the alternative minimum tax also supports the likelihood that MSRs won’t ultimately be hurt by the Biden plan, the analysts noted, citing Washington research by Brian Gardner, a colleague at their parent company Stifel Financial.

“We are paying attention to this issue, but expect it to be resolved in a way that does not change the status quo,” KBW researchers Bose George, Thomas McJoynt-Grifith and Michael Smyth said in the report.

However, the analysts did also address the possibility of the change going through and noted that it would be burdensome for large banks and nonbanks sizable enough to be affected in particular. Nonbanks’ share of the servicing market has grown over time but the number of large players remains limited. The only publicly-traded nonbank in the mortgage industry that KBW covers with this scope is Rocket Mortgage.

“This would create a need to finance the payment of taxes and could put downward pressure on MSR prices as mortgage originators potentially sell some...in order to finance this upfront cash payment,” the researchers said. “We would note that this would be more of a concern for nonbanks since banks can finance this tax payment more easily.”

But ultimately, the effect of a tax policy change on the mortgage servicing rights market would be limited as it would not affect purchasers such as real estate investment trusts.

“Further, it would not impact arrangements like flow sales of MSRs, where the MSR asset is monetized at the time of origination,” the analysts added.