Fannie Mae (FNM), Freddie Mac (FRE) and other mortgage finance companies will reap a substantial tax windfall from an Internal Revenue Service decision this week.
The IRS on Tuesday withdrew proposed rules that would have made it much harder for lenders and others to offset billions of dollars in mortgage and other loan losses they carry on their books. The proposed rules overturned long-settled case law and administrative practice, and lenders had lobbied hard against the proposed rules; still, the IRS move surprised some. Robert Willens, a tax analyst at Robert Willens LLC in New York, called the decision on Tuesday "shocking." The IRS may have been influenced by the fact that many other federal agencies are stepping in to assist participants in the mortgage lending business, Willens said. Steven M. Rosenthal, a partner at law firm Ropes & Gray, LLP in Washington, D.C., said: "The proposed regulations put a looming cloud over the credit market, and I think the situation has been vastly improved now that they've been withdrawn." Winners are likely to be financing companies that extend credit to customers to help them buy cars, houses and other goods, Rosenthal added. Credit-card companies, and Fannie Mae and Freddie Mac were among others he mentioned as benefiting. At issue is the way the IRS considers the making of a loan, or the purchase of a loan in the secondary market. Currently, losses on such loans are treated as ordinary losses and can be offset with ordinary gains produced by companies. The IRS proposal - which interprets Section 1221 (a)(4) of the tax code - would have changed all this by treating losses on loans as capital losses, which can be offset only with capital gains. Corporations generally don't produce a lot of capital gain, so it would have been much harder - or even impossible, in some cases - to offset gains and losses, said Willens. "The losses of Fannie Mae and the others would have been virtually useless, almost impossible to use," said Willens. "That, in turn, would have caused them to have to take write-offs." Too, ordinary losses can be used to offset a wider range of gains and over a longer period of time, Willens added. Specifically, ordinary losses can be used over 23 years, as compared to nine years for capital losses. The withdrawn IRS proposal dates back to 2006, before the credit crisis hit in full. Deepening economic problems may have prompted the move. "All the other federal agencies are bending over backwards to help the mortgage market and the participants, both originators and those who took on the mortgages," said Willens. "The IRS was the outlier, taking a contrary position. I'm assuming someone got to them and said 'Let's get in tune with the rest of the program.'" Andrew DeSouza, a spokesperson for the U.S. Treasury Department, said withdrawing the proposal was simply a response to the many public comments on it that reflected concerns about its interpretation of the tax code. "After we reviewed all of them, we decided the best way forward was to withdraw the regulations while we continue to evaluate this issue." - By Arden Dale, Dow Jones Newswires; 201-938-2052; arden.dale
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