Thrifts are fighting a tax proposal that they fear could cause a shift in home loan business to mortgage bankers from S&Ls.
A House Ways and Means sub-committee heard testimony Sept. 8 on a revenue proposal affecting when and how single-family mortgage points are taken into income.
The revenue proposal would perpetrate the current tax distinction between those points (fees charged by lenders equal to 1% of the face of the loan) that are paid upfront and those that are financed. Financed points would be taken into income over the life of a loan; points paid at closing would be taken into income by a lender when paid.
Either way, thrifts would take a beating, said Michael J. Palko, senior vice president and corporate tax director of Great Western Financial Corp. in Chatsworth, Calif., in his submitted testimony on behalf of the Savings & Community Bankers of America.
The issue is one on which the American Bankers Association has taken no position. The Mortgage Bankers Association could not be reached for comment by press time.
Palko argued the proposal is based on an Internal Revenue Service distinction between financed and upfront point payments that is pointless--pun intended--and has given rise to protracted litigation.
"It can be very difficult to tell whether points have been paid or financed, but the IRS view of reality seems to have been colored by a perceived need to maintain symmetry in the tax treatment of borrowers and lenders," Palko said.
SCBA believes thrifts would be particularly abused by such a proposal because they hold so many long-term mortgage loans in their portfolios.
"The tax difference between treating points as paid at closing or financed is greatest in the case of residential mortgage loans because of the relatively long terms of such loans, assuming, of course, that the lender keeps the loan in portfolio."
This approach, Palko said, would favor lenders who originate loans for quick resale in the secondary market -- a common practice for mortgage bankers. "The proposal will, thus, confer a competitive advantage on mortgage banking operations and create an incentive for thrifts to emphasize zero-point mortgages," he testified.
Instead, SCBA and Palko endorse a Treasury proposal made last December that seeks to bury the tax controversy by taxing all point income the same--over the life of the loan.
