Bigger Tax Bite on Excess Servicing

WASHINGTON - In a decision that is likely to raise the tax bills of hundreds of financial institutions, the Internal Revenue Service has ruled that excess mortgage servicing rights will be subject to higher taxes up-front.

Financial institutions create excess mortgage servicing assets when they retain the rights to a portion of the income stream from mortgages that they have originated and sold into the secondary market.

IRS Sees Skirting of Rules

By retaining income streams, financial institutions are able to spread out their revenues and thus defer income. The IRS, concerned that institutions were skirting tax rules, ruled that excess mortgage servicing rights should be treated as securities, subject to immediate taxes.

The IRS revenue ruling issued last Thursday may spur financial institutions to sell their loans in full, said James O'Connor, tax counsel for the National Council of Savings Institutions. However, "it may cause some higher costs to borrowers, because the originators are paying more tax. Their expenses are higher."

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