Residential Magazine

A Time of Promise and Uncertainty

Independent mortgage lenders and brokers have economic and financial questions to consider

By Santo Chiarelli

From the vantage point of certified public accountants (CPAs), 2020 is shaping up as a year of great promise for lenders and originators. This is due to a strong market for purchase and refinance transactions, some favorable tax rules and the likelihood that the Federal Reserve won’t raise interest rates.

The year also could be filled with great challenges, however, as the mortgage industry grapples with the volatility of a presidential election year and its potential to affect critical federal loan programs and regulations. This is the third year following the adoption of the Tax Cuts and Jobs Act of 2017, which represented the nation’s most significant tax overhaul in more than a decade. This legislation generally included meaningful tax reductions for individuals and businesses — including independent mortgage banks (IMBs) and brokers.

Tax-law impact

The recent tax-law changes have created both challenges and opportunities for mortgage lenders and originators with respect to compliance and strategic planning. Along these lines is an uptick in the need for professional accounting expertise, including the adoption and implementation of accounting best practices.

With two years of the tax-reform bill under our belt, some items have been clarified regarding the legislative impact on IMBs and their shareholders. IMBs that are organized as subchapter S corporations, or limited liability companies, benefit from the 20% pass-through income deduction. Under Section 199A of the Internal Revenue Code, 20% of qualified business income from pass-through entities is deductible at the individual level. IMBs that act exclusively as correspondents will not benefit from this deduction, however, and neither will mortgage brokers.

Under Section 163(j), interest expenses may be limited when the average annual gross receipts for the preceding three years are greater than $25 million. IMBs organized as subchapter C corporations benefit from a federal income-tax rate reduction from 35% to 21%, as well as the elimination of the corporate alternative minimum tax. On a negative note, the net operating loss deduction is now limited to 80% of taxable income, less than the previous ceiling of 90%.

IMBs that develop internal-use software are continuing to see research and development tax credits preserved. And the IRS has issued clarification on the book-tax conformity rule to exclude interest rate lock commitments from taxable income, which is a huge break for IMBs.

CPAs who work with mortgage bankers and brokers should be certain that their clients are taking full advantage of these tax-law changes. This requires constant monitoring and analysis of how these laws will impact the mortgage industry. Accountants should begin analyzing the laws before their clients’ tax year has ended so they are able to make timely suggestions and have them take appropriate action to deploy tax-planning strategies.

Advising clients about whether they should change their tax structure from a C-corp to an S-corp should not be a cookie-cutter task. Each client needs extensive analysis tailored for their specific situation.

Economic snapshot

Across the nation, many IMBs and mortgage subsidiaries of chartered banks experienced record origination volumes and profits last year. These institutions reported a net profit of $1,924 per loan in third-quarter 2019, a 15% quarterly jump and the highest figure seen since fourth-quarter 2012, the Mortgage Bankers Association reported.

Lower interest rates, which have led to increased refinance originations and an overall improvement in the housing market, have contributed in part to the increased profits. It also should be noted that many of these lenders have seen a spike in purchase volumes. With record volumes, however, comes operational and recruiting challenges with respect to mortgage originators, as well as shortages in loan underwriters and processors.

Lenders also have been faced with information-technology challenges as they relate to cybersecurity and constant changes in the compliance landscape. These programs are mandatory in many states but are costly to implement and maintain. And although profits are up in the current lending environment, this will be difficult to maintain when volumes decrease due to higher operational costs and lower corporate margins.

IMBs need to measure improvement and many have devoted significant resources to business process management so they can implement continuous enhancements and optimize their branch operations. To that end, CPAs should encourage their mortgage industry clients to use performance metrics that help them continue to grow their business.

Accountants can provide mortgage professionals with an analysis of key performance indicators (KPIs) to help them make timely and informative decisions about their company’s operations. These KPIs aim to help them adjust more quickly to economic downturns. It takes time for lenders and originators to decide which KPIs are most meaningful and are worth the effort to track. As data accumulates over time, however, management will begin to realize data trends and see the intertwined relationship between KPIs.

Employment trends

The strong economic and lending environments have created an upside for individual mortgage originators and brokers. Originators are making money and generally seem content with their current employers. Meanwhile, originators who are interested in moving to another company appear to have some leverage in negotiating good deals.

Another positive development is that the transitional-licensing legislation signed into law in 2018 took effect this past November. Originators who want to move from a federally insured bank to an IMB face a much more stringent licensing regime. This includes passing the test associated with the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), undergoing an independent background check and completing at least 20 hours of prelicensing education courses.

Transitional licensing gives these originators the opportunity to immediately work for an IMB, with a 120-day period to meet these more stringent requirements. The legislation also facilitates state-to-state transitional licensing, which is helpful to originators currently working at IMBs.

Because of compressed margins for IMBs, increased costs of compliance, and the repurchase risk and responsibilities associated with mortgage banks, the past two years saw an uptick in the formation of independent mortgage brokerages. As the market remains strong, the near-term outlook for mortgage brokers also is positive. IMBs that do not have the origination volume to match increased costs have created a favorable environment for brokers.

This is a presidential election year. It is a fool’s errand to try to predict the outcome and it is even more difficult to predict what the election result will mean for critical federal mortgage programs.

Compliance outlook

This is a presidential election year. It is a fool’s errand to try to predict the outcome and it is even more difficult to predict what the election result will mean for critical federal mortgage programs like the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), the U.S. Department of Agriculture, and the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

Changes are possible, of course, both in 2020 and 2021, since there could be new officials overseeing these federal programs. The Trump administration released a housing-finance reform plan in September of last year, which advocates for a refocusing of federal mortgage programs — including a potential retrenchment of the FHA, for example.

On a more micro level, some IMBs are expressing the challenges in FHA and VA loan-level underwriting. More clarity is needed in relation to expired employment authorization documents. And mortgage brokers continue to hope that 2020 is the year in which changes are made to the qualified mortgage rule to end the so-called “double counting” of broker fees.

Your accountant should have extensive experience with the auditing and compliance requirements contained in the Consolidated Audit Guide issued by the U.S. Department of Housing and Urban Development, as well as GSE regulations. Independent mortgage banks and brokers are strongly encouraged to pay attention to these important requirements so they can remain in good standing with these programs.


  • Santo Chiarelli

    Santo Chiarelli is a partner in charge of the mortgage banking practice at ACS LLP, a firm of certified public accountants and financial advisers based in Iselin, New Jersey. ACS is an associate member of the Community Home Lenders Association. For the past 30 years, Chiarelli has provided accounting and auditing services to industries such as mortgage banks, debt-collection services, construction contractors and asset-based lenders.

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