Special to the
Realty/Builder Connection
This information was sent on behalf of Joe Rogers, executive vice president of Wells Fargo.
Here is what we know… the legislation about borrower-paid mortgage insurance (BPMI) caught many of us in the mortgage industry by surprise – including tax consultants and other financial planners. The President recently signed this legislation. So I want to give you all some background and a little insight by providing answers to the questions I think you’ll ask.
1. When will this legislation be effective?
From what we know, BPMI will be tax-deductible for eligible borrowers effective with fundings on or after Jan. 1. So the borrowers in the pipeline who closed after the first of the year were impacted.
2. Does this legislation apply to purchases, refinances or rehabilitation loans?
Good question. Sad to say, I don’t have a very good answer. Yes on purchases, maybe on refinances and likely on rehabilitation loans. Remember: we do not give tax advice. That is between the borrower and the Internal Revenue Service. The legislation is less-than-clear on this point (and numerous others). We’ll continue to seek clarification.
3. Will this legislation impact only conventional loans or will it also include Government programs?
From what we can tell, it applies to both conventional loans and FHA financing. Note: the legislation also mentions both VA and RHS (rural housing) as eligible. Hmmm, interesting as the last I checked, neither of these loan types actually charged mortgage insurance. Hence you can see some of the confusion.
4. Are all borrowers eligible under this legislation?
Not exactly. In fact, the legislation limits the full deductibility to borrowers with an adjusted gross income (AGI) of $100,000 or less. In the case of a married individual filing a separate return, the AGI maximum is $50,000. The deduction is gradually phased out for borrowers with AGIs up to $109,000. For each $1,000 that the borrower’s AGI exceeds $100,000, the amount treated as “interest” will be reduced by 10 percent. Because we will never know what the borrower’s AGI will be at the time of application or funding, it is even more important not to advise or guide a borrower on any deductibility issues.
5. Will this deductibility last as long as the MI is on the loan, assuming the borrower’s income stays at or below the required AGI?
No … at least as the legislation stands today. In fact, the legislation specifically states that unless this legislation is extended, it will expire on Dec. 31, 2007. Another reason not to give advice – what may be true in January may not be true the following year.
6. What about upfront premiums that are paid by the borrower?
Hmm, this question is a bit harder. Basically, we need to remember that on conventional loans, very few borrowers select this option today. However, on FHA loans, we do see this option – which raises several questions. The biggest question: is the upfront premium considered a premium to cover the expected life of the loan? If so, it would not be a surprise if the IRS indicated that any deduction should be spread over the life of the loan. However, as noted above, this legislation as currently written is only for the year 2007. We’ve got a Catch 22. If a borrower considers an upfront premium on a conventional loan, it would raise the issue of financing the premium, getting a deduction for the interest paid and also applying for the upfront fee. Some feel this sort of double deduction would be frowned on by the IRS. Again, not for you to say.
7. How should we communicate this information to our borrowers?
We will do exactly what we are expected to do by the IRS. That is, we will report what is paid. Then, all deductibility issues will be between the borrower and the IRS. The legislation requires taxpayers to itemize their tax return in order to take advantage of the legislation. Essentially, our servicing team will send out the normal yearly tax statement including what the borrowers have paid in interest and also mortgage insurance. It is likely our servicing team will do this for all borrowers, rather than try to predict who is eligible. While we will comply with the requirements, it is a bit more challenging to report upfront MI at this time.
So what does this mean from a competitive perspective? How should we respond to the obvious questions that will be asked by customers and clients about which option to select … BPMI, LPMI or a Simo Close second?
The answers will vary by customer, product type, borrower preferences, their expectations of property values, their expected time in the home, anticipation of interest rates … and many more variables. The bottom line: it is the customer’s choice. Offer the options and let them make the best economic decisions for themselves.