Senate reconciliation proposals would help, hurt housing

Provisions restoring the mortgage insurance premium deduction are included in the Senate reconciliation bill, the latest path for its supporters to bring it back to the Tax Code.

It is one of several real estate and housing provisions up for debate, including one that addresses low income housing tax credits.

The MI deduction first was approved for the 2007 tax year, after kicking around Congress for several sessions prior. However, the deduction was never made permanent and renewal over the next decade-plus was not a certainty.

After the 2021 tax year, the deduction expired.

Attempts to revive the MI deduction

Several bipartisan attempts have been made since then to bring it back, but have failed to get off the ground. The latest is H.R. 2760, from Rep. Vern Buchanan, R-Fla. This bill, the Middle Class Mortgage Insurance Premium Act, was introduced in April but has only 11 co-sponsors from both parties, including Rep. Jimmy Panetta, D-Calif.

The Senate Finance Committee reconciliation bill, led by Sens. Mike Crapo, R-Idaho and Thom Tillis, R-N.C., includes the restoration provision, said the U.S. Mortgage Insurers.

Tillis and Sen. Maggie Hassan, D-N.H. had previously introduced the Senate version of Buchanan's bill, USMI said.

"Renewing and making permanent the MI premium deduction would deliver meaningful tax relief directly to working class Americans and make homeownership more affordable without increasing risk in the housing finance system," said USMI President Seth Appleton in a statement.

"From 2007 until its expiration after tax year 2021, the MI premium deduction was claimed 44 million times, representing a combined $65 billion in deductions for hardworking Americans with an average annual deduction of $1,454 per qualified taxpayer."

Industry support for the deduction

The Community Home Lenders of America has long-supported bringing the MI deduction back.

"This just makes sense," Executive Director Scott Olson said. "Federal Housing Administration premiums can be rolled into an FHA loan and therefore are tax deductible; so too should MI premiums, which are comparable."

In addition, the CHLA supports the House version of the bill's increase in the state and local tax deduction cap, known as SALT, to $40,000.

The group hopes this is "eventually agreed to by the Senate, restoring some of the lost tax deductions related to homeownership that were lost in the 2017 tax bill," Olson said. Whether either of those proposals survives the process is unknown given the need to balance tax cuts with spending reductions to appease groups of Republicans in both houses.

The reconciliation bill also includes support for low income housing tax credits.

Warnings about a tax code change

Meanwhile, the Mortgage Bankers Association sent a second letter warning that a proposed Section 899 of the Tax Code, included in the House bill, needs to be structured carefully or it could hurt investment and lending in American communities.

This new provision, as it currently stands, "would increase the net income and withholding tax rates on U.S.-source income for non-U.S. persons who are classified as 'applicable persons,'" a blog from the legal firm of Paul Hastings said. "Applicable persons include individuals, corporations, governments and sovereign wealth funds, and non-U.S. partnerships resident in a 'discriminatory' country."

Previously, on June 12, the MBA was one of 11 signatories, along with the CRE Finance Council, in a letter also supportive of the general concept of Section 899 creating a global tax regime but concerned that "the retaliatory tax measures…could have significant negative, unintended consequences."

That included higher mortgage rates and reduced housing supply. An existing portfolio interest exemption would cover assets like mortgage-backed securities. But other equity and debt investments would be impacted.

Why the housing finance industry is concerned

The discussions around Section 899 have already stifled potential investors from acting, said David McCarthy, managing director, head of legislative affairs at CREFC; this sentiment was echoed in the MBA letter.

"Even though the Senate Bill has a delay that it wouldn't necessarily start till 2027, the time horizon on these investments is well beyond that," McCarthy explained. "Folks are concerned that they're going to make an investment and it's going to get caught up in a higher tax regime."

The MBA in its recent standalone letter said even with a proposed delay in the Senate version, just the threat of the higher tax rates will choke investment and lending unless appropriately tailored, including specific language which exempts portfolio income.

This should make clear it would exclude interest income from mortgages from both U.S. single-family and income producing properties.

"Increasing the tax rates paid by certain foreign individuals and entities on interest coming from mortgage loans backed by domestic real estate, including single family mortgages, will directly limit the availability and increase the cost of those mortgages. In many cases, it will lead to increased costs for borrowers on loans that have already been made," the letter said.

—Bonnie Sinnock contributed to this story