The residential real estate industry won an important victory through the decision of the Senate Finance Committee to exempt purchased mortgage servicing rights from tax legislation establishing a uniform amortization period for identifiable intangibles.

Now the industry just has to retain the provision as the bill continues its way through the seemingly interminable legislative process.

The decision by the Senate panel was made at the last minute and is one of the few positive surprises in the package of tax increases and services cuts adopted by the committee. The bill now goes to the senate floor, where it is likely to be retained, and if passed, to a House-Senate conference committee to settle differences between the two chambers' bills.

In most cases, the surprises for the financial services industry were negative ones, as the finance panel scraped to make up $70 billion in revenue lost through a decision to ditch an energy tax contained in the House bill that would have raised $70 billion.

For example, provisions that would have facilitated real estate loan workouts or reduced the discriminatory treatment accorded commercial real estate for tax purposes, the so-called "passive loss" rules, as contained in the House bill, were deleted. However, the Senate Finance legislation did reduce the amortization period for commercial real estate to 38 years from the 39 years contained in the House bill. The current amortization period is 31-1/2 years.

"The decision is important to the real estate lending industry because it will help maintain the value of PMSRs currently held by thrifts," James O'Connor, tax lawyer for the Savings & Community Bankers of America. "Otherwise, the tax bill would in effect have doubled, from the seven-year period allowed by the Internal Revenue Service to the 14-year period mandated by the finance committee bill, the amortization period for PMSRs."

The actual impact would have been greater because the provision as adopted by the finance panel allows institutions to deduct only 75% of the value of their identifiable intangibles over the 14-year amortization period. In effect, that increases the amortization period to an estimated 18 years for most identifiable intangibles, including core deposits and customer lists.

The bill adopted by the House calls for a uniform 14-year amortization period for all identifiable intangibles, including PMSRs. That decision rendered moot a Supreme Court ruling in The Newark Morning News case several months ago that allowed a lower amortization period for identifiable intangibles if institutions could prove the product had a shorter saleable period.

Consumers would also have been affected, because lenders would have ultimately passed on the lower value of PMSRs to homebuyers through higher interest rates and higher fees," O'Connor said.

Industry officials said that SCBA, which carried the ball for the mortgage lending industry on this issue, was able to persuade Sen. Daniel Patrick Moynihan, D-N.Y,. and chairman of the Senate Finance Committee, that a 14-year amortization period for PMSRs was in effect a regressive tax because it fell most heavily on smaller loans - for example, those guaranteed by the Veterans Administration or the Federal Housing Administration. Larger loans, including conventionals and jumbos, would have been less affected by the provision, O'Connor said.

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