WASHINGTON WEEKLY
Keeping the Markets Informed from the Capital
November 9, 2007
House Approves One-Year AMT Relief Bill
The House approved the Temporary Tax Relief Act of 2007 (H.R.3996), which includes a one-year alternative minimum tax (AMT) patch and a number of tax extender provisions. H.R.3996 also includes a provision requiring brokers to report adjusted basis of securities sales. The basis reporting provision reflects a number of recommendations made by SIFMA in a letter to House Ways and Means Committee Chairman Charles Rangel (D-NY) last week. The Temporary Tax Relief Act would also tax carried interest earned by partners performing investment management services as ordinary income and would impose current taxation on any nonqualified deferred compensation of a “nonqualified entity” once there is no substantial risk of forfeiture.
The House also approved legislation (H.R.3997) aimed at providing tax relief for members of the armed services by a vote of 410-0.
The House Financial Services Committee approved legislation (H.R.3915) to tighten lending standards this week by a vote of 45-19. Prior to approving the Mortgage Reform and Anti-Predatory Lending Act of 2007, the Committee adopted a manager’s amendment, which among other things includes a preemption clause for the bill’s securitizer liability language. SIFMA and the American Securitization Forum (ASF) sent a letter to Committee leadership prior to the markup in appreciation of some of the changes made in the manager’s amendment and calling for additional changes to the bill.
The House Financial Services Committee also approved this week a bill that would require certain borrowers to open escrow accounts and would create federal appraisal standards.
The House Judiciary Committee began consideration of the Emergency Home Ownership and Mortgage Equity Protection Act (H.R.3609). Action on the bill was delayed until next week.
In a letter to House Ways and Means Committee leadership, SIFMA opposed changing the tax treatment of Exchange-Traded Notes (ETNs).
Federal Reserve Chairman Ben Bernanke testified on the economic outlook before the Joint Economic Committee (JEC) this week.
House Approves One-Year AMT Relief
The House approved the Temporary Tax Relief Act of 2007 (H.R.3996), which includes a one-year alternative minimum tax (AMT) patch and a number of tax extender provisions by a vote of 216-193. The nearly $80 billion bill includes:
- A one-year extension of the AMT patch
- Expansion of the refundable portion of the child tax credit for one year
- A one-year extension of tax provisions that expire in 2007 (other than energy-related expiring provisions) including the qualified zone academy bond (QZAB) program and the special rules for veterans mortgage bonds for one year
- A provision allowing tax-exempt organizations to invest in onshore hedge funds without incurring the unrelated business income tax
H.R.3996 also includes most of the text of the Mortgage Forgiveness Debt Relief Act (H.R.3648) which would permanently exclude discharged home mortgage indebtedness from gross income. In order to pay for these provisions and others in the bill, H.R.3996 would:
- Tax carried interest earned by partners performing investment management services as ordinary income
- Impose current taxation on any nonqualified deferred compensation of a “nonqualified entity” once there is no substantial risk of forfeiture
- Delay the effective date of the worldwide interest allocation election to 2018
- Require brokers to report adjusted basis of securities sales (proposal reflects many of SIFMA’s recommendations for improvements from previous proposals)
In a statement of administration policy this week, the administration threatened to veto the bill in its current form.
House Approves HEART Act
The House approved the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2007 (H.R.3997) this week by a vote of 410-0. The HEART Act includes a number of tax relief provisions aimed at members of the armed services and other service volunteers. H.R.3997 would make permanent the limited exception from the first-time homebuyer requirement for veterans under the qualified mortgage bond program. The bill would also increase the annual limit on qualified veterans’ mortgage bonds that can be issued in Alaska, Oregon and Wisconsin to $100 million in years after December 31, 2009. For 2008 and 2009, the $100 million limit is phased in by applying the present-law applicable percentages. The bill also repeals the requirement that veterans receiving loans financed with qualified veterans’ mortgage bonds have to have served before 1977 and reduces the eligibility period to twenty-five years following release from military service for veterans’ mortgage bonds issued in California or Texas. H.R.3997 would also make permanent the ability of individuals who are called to active duty for at least 180 days to make penalty-free withdrawals from retirement plans.
HFSC Approves Mortgage Reform Bill
By a vote of 45-19, the House Financial Services Committee approved the Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.R.3915). The bill establishes a federal duty of care; prohibits steering; calls for licensing and registration of mortgage originators, including brokers and bank loan officers; and establishes a minimum standard for all mortgages requiring lenders to consider a borrower’s “reasonable ability” to repay a loan and to ensure that refinanced loans provide borrowers a “net tangible benefit.” Prior to adopting H.R.3915, the Committee approved a manager’s amendment, which would modify the bill’s securitizer liability language to create a uniform federal standard that would preempt state laws. The manager’s amendment also incorporates language from the Fair Mortgage Practices Act (H.R.3012), introduced by Rep. Spencer Bachus (R-AL), which would create a Nationwide Mortgage Licensing System and Registry; outlines five categories that a non-prime loan must meet to be considered a “qualified safe harbor loan,” such as documenting the borrower’s income and underwriting to the fully indexed rate; includes the Federal Reserve among the regulators tasked with implementing the bill; reduces the amount of time a borrower could move to rescind a loan to three years; and narrows the original bill’s anti-steering language.
The Committee also approved an amendment offered by Rep. Al Green (D-TX) that would require borrowers be given information on the total amount of their loan and the maximum amount of their regular payments according to the maximum interest rate. The Committee also approved by voice vote an amendment offered by Rep. Brad Sherman (D-CA) clarifying that the term “loan originator” does not apply to realtors if they are acting only as real estate agents. The Committee defeated by voice vote an amendment offered by Rep. Richard Baker (R-LA) which would have preempted state predatory lending laws for seven years. The Committee also rejected a number of amendments, including an amendment offered by Rep. Steven Pearce (R-NM), which would strike the bill’s anti-steering provisions by a vote of 22-38; an amendment offered by Rep. Patrick McHenry (R-NC) which would strike Title III of the bill by a vote of 25-36; an amendment from Rep. Scott Garrett (R-NJ) which would strike Section 203 dealing with rebuttable presumptions for creditors 26-37; an amendment by Rep. Tom Price (R-GA) which would provide the provisions of the bill only apply to subprime loans by a vote of 19-44; and an amendment by Rep. John Campbell (R-CA) which would strike Section 204 dealing with securitizer liability by a vote of 22-44.
Rep. Gary Miller (R-CA) introduced and withdrew an amendment that would allow borrowers to finance certain closing costs and fees and an amendment that would have changed the HOEPA triggers included in Title III of the bill. Miller withdrew the amendment after Chairman Barney Frank (D-MA) offered to work with him on the issues before the bill went to the floor. Rep. Mike Castle (R-DE) also offered and withdrew an amendment after Chairman Frank offered to work with him before H.R.3915 is brought to the floor. Rep. Castle’s amendment would hold harmless any creditor, assignee, securitizer, or other holder of a residential mortgage from litigation by an investor or any other third party, or regulatory or enforcement action by any Federal or State agency for a period of six months following the date of enactment if the residential mortgage is subject to a "qualified loan modification or workout plan."
In a letter sent to Chairman Barney Frank (D-MA) and Ranking Member Spencer Bachus (R-AL) prior to the markup, SIFMA and the American Securitization Forum (ASF) thanked the Committee for the open and inclusive process by which the bill was crafted. SIFMA and ASF expressed appreciation for the understanding of the importance of the secondary market and that the manager’s amendment addresses many concerns highlighted in their recent testimony. Specifically, SIFMA and ASF expressed appreciation that the manager’s amendment makes the bill’s assignee liability language a national standard and makes adjustments to broaden the volume of loans covered by the safe harbor. SIFMA and the ASF called for federal preemption for Title III and other parts of the bill and suggested reasonable limits on the amount of adjustments that can occur during the life of the loan more accurately reflects the proper test for adjustable rate projects. SIFMA and ASF expressed concern that Title III of the bill expands the scope of HOEPA through the lowering of APR, points and fees. The organizations also called on the Committee to change the bill’s prohibition on mandatory arbitration. SIFMA and will continue to work with the Committee to resolve these concerns.
HFSC Approves Bill Requiring Escrow Accounts
The House Financial Services Committee approved the Escrow, Appraisal and Mortgage Servicing Improvements Act (H.R.3837), introduced by Rep. Paul Kanjorski (D-PA), by voice vote. H.R.3837 would require certain borrowers to open escrow accounts to protect against unexpected taxes and insurance premiums; and create federal appraisal standards. Under the bill, lenders would be prohibited from issuing high-cost loans without first obtaining a written appraisal of the properties. Prior to approving the bill, the Committee adopted by a voice vote a manager's amendment in the nature of a substitute. The manager’s amendment limited the mandatory escrow requirements to certain first-time mortgage applicants and would delay the implementation date to eighteen months after enactment. The Committee also adopted by voice vote an amendment offered by Rep. Gwen Moore (D-WI) which would establish minimum oversight standards for appraisal management companies and would apply the bill's anti-pressure provisions to appraisal management companies. During the debate, Rep. Maxine Waters (D-CA) offered and withdrew an amendment that would have required mortgage servicers to undertake "reasonable" loss mitigation activities. Rep. Kanjorski asked Rep. Waters to work with him on either a stand-alone loss mitigation bill or a floor amendment to H.R.3915.
Committee Delays Action on Bankruptcy Bill
The House Judiciary Committee began consideration of the Emergency Home Ownership and Mortgage Equity Protection Act of 2007 (H.R.3609) this week. However, action on the bill was postponed until next week after a bipartisan agreement on modifications to the bill fell through. H.R.3609 would grant judges the authority to modify primary mortgages in bankruptcy proceedings. Rep. Steve Chabot (R-OH) introduced a more limited bill, the HOMES Act (H.R.3778), which authorizes bankruptcy judges to revalue a primary residence based on its actual market value, instead of based on the appraised price often used for mortgage closings and would give judges only the authority to delay, modify or prohibit late fees, penalties and mortgage rate increases. On the day of the markup, it appeared Rep. Chabot and Judiciary Committee Chairman John Conyers (D-MI) had agreed on a substitute amendment, but apparently the two could not agree on a provision that would cap the level of homeowners who could seek relief to those at 150 percent of their county median income level. During consideration this week, Rep. Chris Cannon (R-UT) offered an amendment which would, among other things, allow cram-downs only in instances where the debtor and lender both agree to a cram-down. The markup is expected to continue next week.
Prior to the markup, SIFMA and the American Securitization Forum (ASF) sent a letter to Judiciary Committee Chairman John Conyers and Ranking Member Lamar Smith (R-TX) in opposition to H.R.3609. SIFMA and the ASF warned the bill represents a fundamental change to mortgage finance that would undermine the $6.5 trillion secondary mortgage market. SIFMA and the ASF said allowing bankruptcy judges to change the terms of an existing mortgage loan and therefore altering mortgage lenders’ property rights, raises significant substantive due process concerns and may involve a taking of property within the ambit of the Takings Clause of the Fifth Amendment.
SIFMA Opposes Changing the Tax Treatment of ETNs
In a letter to House Ways and Means Committee Chairman Charles Rangel (D-NY) and Ranking Member Jim McCrery (R-LA), SIFMA opposed changing the tax treatment of Exchange-Traded Notes (ETNs). SIFMA said the tax treatment of financial products should be driven by the product’s tax attributes. Last week, the Ways and Means Committee received a letter requesting a legislative change to the tax treatment of ETNs, because of the competition these products may pose to mutual funds. In its letter, SIFMA points out that mutual funds and ETNs are taxed differently, because they are fundamentally different products with different characteristics. Changing the tax treatment of ETNs would require holders of ETNs to pay tax on income they do not receive and may never receive. SIFMA said taxing phantom income that is not actually received is an ill-advised policy that Congress should not pursue with respect to ETNs, prepaid forward contracts or corporate stock.
Bernanke Delivers Economic Outlook to JEC
In testimony before the Joint Economic Committee this week, Federal Reserve Chairman Ben Bernanke called on mortgage lenders and mortgage servicers to pursue loan workouts for troubled borrowers. While he noted servicers have recently increased their efforts, Bernanke suggested the development of standardized approaches to workouts and sharing best practices could help increase the scale of loss mitigation efforts. Bernanke called on Congress to modernize the Federal Housing Administration (FHA)--specifically to encourage joint efforts with the private sector that expedite refinancing of subprime loans held by creditworthy borrowers, to grant the agency flexibility to design products that improve affordability, and to allow the FHA to tailor the premiums it charges for mortgage insurance to the risk profile of the borrower. Chairman Bernanke warned Congress to be careful when considering whether to raise the conforming loan limit. Bernanke said if Congress raises the limit from the current level of $417,000, it should only be a temporary increase. He said one option to consider would be to allow the housing-related government-sponsored enterprises (GSEs) to securitize jumbo loans up to $1 million and have the federal government act as a guarantor. JEC Chairman Chuck Schumer (D-NY) said it was an idea he was willing to explore legislatively. While Chairman Bernanke would not comment on specific proposals, he warned an increase in taxes would lead to an overall decrease in consumer demand. Bernanke said a large tax increase will be a significant drag on the economy given current predictions for slow economic growth.
Bills Introduced This Week
Rep. Ron Klein (D-FL) introduced legislation (H.R.4085) this week that would make permanent the ability of individuals who are called to active duty for at least 180 days to make penalty-free withdrawals from retirement plans.
The AMT Repeal and Tax Freedom Act (S.2318), introduced by Sen. John Ensign (R-NV) and Sen. Mike Crapo (R-ID), would permanently repeal the alternative minimum tax and would make permanent all of the marginal rate tax brackets. S.2318 would also make permanent the current tax rate on capital gains and dividends.
The Week Ahead
- The Senate Finance Committee will hold a hearing on estate taxes on Wednesday, November 14.
- On Wednesday, November 14, Securities and Exchange Commission Chairman Christopher Cox will testify before the Senate Banking Committee on shareholder rights and proxy access.
- Also on November 14, the Senate Banking Committee will hold a hearing on sovereign wealth funds.
- The House Judiciary Committee is expected to continue its markup of H.R.3609 on Wednesday, November 14.