Feb. 24: Notes on the continued impact of the tax plan, and flawed racial bias lending reporting

Lots going on out there of concern to residential lenders. Plenty of lenders are scaling back while at the same time trying to grab other’s market share – it only takes a few billion a month pinched from the big bank retail groups to make a decent year for hundreds of small and mid-sized lenders. As an industry we continue to ruminate on, and be influenced, by the tax plan. It is moving rates. And investors & vendors are reacting to changes. On top of that, we continue to struggle to overcome the public’s perception of lenders and our motives. I visit with plenty of people in our industry around the nation and will attest to our collective willingness to help borrowers, be fair, and sustain accountability in the face of declining volumes and margins.

Lending in the public eye

An activist group named The Center for Investigative Reporting (CIR), has been using a deeply flawed analysis of government lending data to prop up a story about racial disparities in mortgage lending that they have been peddling to news outlets.

Bruce writes, “I’m sure I’m one of thousands who have watched the PBS NewsHour the last few days and seen the poor reporting done about racially biased lending. I don’t know who the best candidate is to rebut all the errors that the reporter made- from blaming banks for profiling/redlining to claiming that brokers were unregulated and responsible for declining loan applications from minority applicants. But I figured you had enough of a platform to push back against this to call others to arms against it. The crux of the issue was the mistaken belief that an underwriter had any latitude on any fundamental approval requirements, from DTI to credit scores.

“I was forced to retire after 30 years in the business, it became too expensive for a mom and pop shop to afford a compliance officer to interpret the various lenders’ interpretation of the regulations and keep me out of trouble….and that made it not fun anymore. I watched in dismay as the banks painted the brokers as the cause of the meltdown, conspired w the govt to write regulations that their competition would have trouble complying with and now this reporting that gives the impression that lenders- brokers OR banks take any interest in a borrower’s race when approving loans and the effect on the public.

“Hopefully one of your more connected readers can reach out to rebut this, the reporter stated that ‘the banks refused comment.’ I find that hard to believe when so much of the reporting was in error.”

The MBA’s Dave Stevens sent out, “Many of you are probably aware of the very negative story that came out about the industry discriminating against minorities. We tried to provide them factual data, they refused to use it. The story has since been picked up by AP and ran on national public radio twice. I’ve posted this blog as a response and any of you should feel free to respond to inquiries about the issue with this as needed. Various members of Congress have already chimed in and we will use this with them as well.

“Make no mistake, discrimination is unacceptable in any way, at any time. Period. End of Story. And yes, members of minority communities are being denied mortgage loans at a greater rate than white borrowers.  But it is flat-out incorrect, defamatory and disgraceful to accuse the mortgage lending industry of denying loans to borrowers simply based on the color of their skin.

“What this group is doing – not just relying on a study that fails to consider many of the key data-based variables that lenders rely on to make an individual loan decision, but also cherry-picking among loan types – is actually counterproductive to the important discussion we are having regarding access to credit challenges in our nation’s communities.”

MBA and its members have been working long and hard to find ways to responsibly expand the credit box to serve borrowers of all demographics, with different credit profiles and income levels. With the coming of the Millennials — the largest, most diverse generation this country has ever seen — it is of paramount importance we solve this. But false narratives constructed to generate scintillating headlines and tarnish an entire industry are not a productive means to have this important discussion. This kind of faulty reporting is insulting and insensitive to the realities of credit access in the US housing market and only serves to distract from the real issues that are preventing minorities from being able to enjoy the benefits of homeownership.” (Click on the link above for the full story!)


No state tax code is identical and, largely as a result, what the average American pays annually in taxes varies from state to state. If we were driven purely by avoiding taxes, we’d flock to Alaska, Wyoming, and South Dakota, and stay away from New York, Connecticut, and California. But we aren’t.

Last Saturday this commentary noted that the final language rushed through Congress last month reveals that interest-deductible HELOCs and second mortgages should still be available to homeowners provided they qualify on two criteria: they use the proceeds of the loan to make “substantial improvements” to their home, and the combined total of their first mortgage balance and their HELOC or second mortgage does not exceed the new $750,000 limit on mortgage amounts qualified for interest deductions.”

Although Section 11043 of the new tax law eliminated home-equity debt interest deductions, it left virtually untouched interest deductions for primary home mortgage debt (“acquisition indebtedness”) that is used to buy, improve or construct a new home. As long as you follow the rules on what constitutes a capital improvement — spelled out in IRS Publication 530 — and do not exceed the $750,000 total debt limit, it is deductible. It is unlikely the changes would have an impact on whether to undertake a project; however, it may influence the size and the scope of the project.

As Isaac Boltansky with Compass Research notes, “On February 21, the IRS released guidance on the deductibility of home equity lines of credit (HELOC). The guidance states: ‘The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.’ The ‘buy, build or substantially improve’ exemption is notably broad and should be viewed as a modest positive for the housing market compared to expectations immediately following passage of the new tax law.

From the capital markets ranks BJ Necel writes, “It didn’t take long for a lawsuit against the federal government over the GOP tax bill as New York, New Jersey, and Connecticut announced plans to take action over the provision capping state and local tax deductions (SALT) at $10,000. The provision is used to offset other broad base reforms such as the reduction in marginal tax rates as well as the doubling of the standard deduction while the SALT deduction is only used by roughly 1/3 of taxpayers nationwide and disproportionally benefits higher income individuals in higher tax states. Historically, the SALT deduction has been around since the Revenue Act of 1913 following the passage of the 16th amendment of the US Constitution, which gave Congress the author to levy income taxes. It has been under attack, however, for the better part of the last forty years with opponents and advocates from both sides of the political divide. It was Andrew Cuomo’s father, then Governor of New York Mario Cuomo, who led a coalition against the elimination of SALT deductibility during the 1986 tax reform debate.”  Thanks BJ!

What is the status of the deduction for mortgage insurance premiums (PMI)? Initially the deduction for mortgage insurance premiums (PMI) was not reinstated. But the tax extender bill was included in the budget approved on 2/9. This included a one-year extension -for 2017- of deductibility for MI premium. The full text of the bill can be found here. This is the part pertinent to MI, which can be found on page 198. The only update was the extension for 2017; everything else remains unchanged (income caps, etc.). (Thank you to Suzette Jordan for passing this along.)

The reduction in the cap on mortgage interest from up to $1 million of mortgage debt to be deductible to $750,000 has garnered much of the attention out the changes in the tax code directly affecting housing. While the average amount of mortgage debt varies by state, it is well below this amount in each and the average new home sales price was $377,100 in the last Census Bureau report.

Of course, anyone obtaining a reverse mortgage, while they won’t make any mortgage payments, will still be responsible for property taxes and homeowners insurance.

An area that would potentially bring some relief, especially to first-time homebuyers, is the reduction in the corporate tax from 35% to 21% which will improve the profitability of large national homebuilders and potentially lead them down market into constructing more entry and mid-level tract housing. With home price appreciation outpacing income growth, this brings the possibility of improving affordability in those markets.

A company put out a “tax plan calculator” for borrowers to gauge the impact of the tax plan. And the Federal Reserve Open Market Committee’s minutes from the last meeting noted that, “A number of participants indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting in light of the strength of recent data on economic activity in the United States and abroad, continued accommodative financial conditions, and information suggesting that the effects of recently enacted tax changes—while still uncertain—might be somewhat larger in the near term than previously thought.”

4506-Transcripts.com, a new verification report supplier for tax transcript data, has been approved and is available to provide verification of income via the 4506-Transcripts.com Tax Transcripts report. The report verifies Social Security, self-employed, retirement, and commission income types. To get started with the DU validation service or add a vendor, review the Implementation Checklist, complete the activation process with your vendor of choice, and begin requesting vendor verification reports.

The National Council of State Housing Agencies (NCSHA) has published updated recommended practices for state Housing Finance Agency (HFA) administration of the Low Income Housing Tax Credit (Housing Credit) program. The new guidelines respond to current program challenges and opportunities by updating and expanding both NCSHA’s existing Recommended Practices in Housing Credit Allocation and Underwriting and Recommended Practices in Housing Credit Compliance Monitoring. The final report is a consolidation of these two sets of practices, covering the breadth of state program administration responsibilities. The report significantly strengthens several existing recommended practices and includes 13 important new practices.

There will be questions regarding how the “Tax Cuts and Jobs Act” specifically affects you and your business, and what decisions you should be making to best mitigate risk and take advantage of new opportunities. Mortgage company tax firms are there to help. Spiegel Accountancy Corp. will answer questions, and Richey May will continue to provide more details; reach out to the Richey May tax team.

Under the tax legislation just signed into law, the Mortgage Credit Certificate (MCC) program will not be eliminated after December 31, 2017.This means existing approved MCCs programs may continue to be offered by Mountain West Financial. Please note that CalHFA, however, has provided special guidance regarding its MCC program.

PennyMac Correspondent Group has posted a new announcement regarding 2017 tax transcripts. Freddie Mac recently extended the required effective dates of their rental income changes to November 2018. PennyMac is aligning with this update and will not require Lenders to implement the changes at this time. An additional announcement will be released with PennyMac effective dates later in the year.

Ditech has changed its Tax Service fee to $89.50 effective for all loans registered and/or locked on or after January 10, 2018.

Mortgage Quality Management and Research LLC (MQMR) announced that its Internal Audit services offering meets or exceeds the requirements for Fannie Mae seller/servicers to be in compliance per its SEL-2017-10 update. Fannie Mae enforcement of the updated requirements begins July 1, 2018. MQMR has adapted its own policies and procedures to support the updated Fannie Mae requirements covering approved seller/servicers who “must have internal audit and management controls to evaluate and monitor the overall quality of their loan production and servicing.” MQMR Internal Audit services deliver the specific elements Fannie Mae requires and helps its Internal Audit clients provide required documentation. For more information about MQMR Fannie Mae compliant Internal Audit services, click this link or send an email to: CompliantInternalAudit@MQMResearch.com.

(From a friend who’s a vet.)

What do you call a bull with no legs?

Ground beef!

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Rob Chrisman