PMSRs sound like a health problem. And for some participants in the mortgage business, that indeed may prove to be the case.
The new federal budget law requires that the cost of PMSRs, or purchased mortgage servicing rights, be amortized over nine years.
That's far longer than the lifespan of most mortgages. But it could have been worse, most executives say, because other intangible assets will have to be amortized over 20 years.
Bad News for RTC?
Still, it's hardly good news: The nine-year schedule seems likely to reduce the value of servicing rights because of the smaller tax deductions available each year.
This reduced value would affect the revenues of those selling loans with the rights attached. That includes large numbers of banks and thrifts.
It also appears to be bad news for the Resolution Trust Corp., which has some big servicing portfolios that it plans to sell - most notably those of Standard Federal of Gaithersburg, Md., and Homefed of San Diego.
The RTC's problem could be especially knotty. James O'Connor, tax counsel for the Savings and Community Bankers Association, says the law requires 15-year amortization of any servicing rights acquired through the acquisition of a whole company.
The idea is to require uniform amortization of acquired intangibles in order to prevent acquirers from assigning excessive values to shorter-lived assets.
The RTC had been planning to market Standard Federal and other properties as complete businesses, and that would presumably trigger the 15-year schedule. But because Standard's portfolio includes much subservicing, which is not affected by the changes, the severity of the impact is unclear.
That's the cloud. The silver lining: another provision of the budget measure will keep many lenders in the business of originating mortgages for low-income families and selling the loans into the secondary market.
The budget permanently authorizes tax exemptions for mortgage revenue bonds, which are issued by state agencies and other municipal bodies to fund inexpensive mortgages for low-income households. The mortgages, which exceed $1 billion a year, are originated by lenders of all kinds.
|Significant and Positive Development'
Fannie Mae is especially enthusiastic about the permanent authorization. "It's a very significant and positive development," said Larry Dale, executive director of Fannie's national housing impact division.
Fannie has bought about $3.8 billion in such revenue bonds over the last five years.
Freddie Mac said it was also "aggressively" involved in revenue bond programs, but no figures were immediately available.