A top Clinton administration tax policy-maker in the Treasury Department opposes a House Ways and Means panel's tax proposal for mortgage points - which would hurt portfolio lenders - on highly unusual grounds: "pure economics."
After presenting the administration's position on a slew of miscellaneous revenue measures before the Select Revenue Measures Subcommittee, Leslie B. Samuels, Treasury's assistant secretary for tax policy, said his agency based its opposition to the panel's mortgage point tax approach on "pure economics."
If this is true, it would introduce the House Ways and Means Committee to a refreshing alternative to political clout, the conventional measuring stick used to judge the merits of national tax policies.
Samuels spelled out his purely economic objections to the House approach to mortgage point taxation in testimony submitted to the panel.
"When a lender simultaneously makes a loan and receives points paid by the borrower, the net economic effect is the making of a loan at a discount (for example, a transaction involving a $100,000 loan and a payment of three points, or $3,000, represents a loan of $97,000 with $100,000 payable at maturity), "said a detailed analysis of the issue submitted to Congress by Samuels.
"We believe that the appropriate treatment of this discount is provided under the original issue discount provisions of the [Internal Revenue] Code (i.e., the discount must be taken into income by the lender over the term of the loan on a constant yield-to-maturity basis). Therefore, we oppose this proposal, which would, in effect, treat the loan and the payment of points as two separate transactions," he told the panel.
The House revenue proposal would continue 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.
This distinction hurts portfolio lenders, who say it is based on smoke and mirrors. Their mortgage banker competitors are not losing sleep over the issue, because they don't hold mortgages long enough to worry about the tax. In contrast, portfolio lenders worry that this tax policy shifts the competitive advantage to mortgage bankers.
The Mortgage Banker-s Association has not taken an official position on the issue, because members don't believe it will affect them directly. "Our position is it won't have a significant impact on mortgage bankers," said Robert Josephs, a lobbyist with the trade group. "We're not as concerned about it as the thrifts are."
In testimony before the same panel Sept. 8, a Savings & Community Bankers of America representative endorsed a proposal last December that seeks to bury the tax controversy by taxing all point income the same - over the life of the loan.
If this revenue proposal is really such a violation of pure economics, why was it introduced? This isn't easy to answer because the less-than-pure Ways and Means Committee is not divulging the identifies of the sponsors of its miscellaneous revenue measures.
A Ways and Means spokesman said the subcommittee and committee will call a meeting to decide which of the hundreds of miscellaneous revenue issues is worth pursuing. These will be introduced either as a free-standing bill or attached to some other legislation, probably before year-end.