NEW YORK, Sept 4 (IFR) - Investors holding non-agency RMBS
bonds could wind up with surprise losses if US mortgage debt
relief legislation is not extended soon, but the measure has
been held up by political stalemate.
Homeowners could face steep tax bills if the 2007 Mortgage
Debt Relief Act is not renewed before April 2015, which could
cause some to walk away from their loans - in turn putting
pressure on legacy RMBS.
The measure, which has been extended once already, exempts
up to US$2m of mortgage debt forgiven by a lender from being
considered as US federal taxable income.
But with mid-term elections looming in November, a new
extension has been held up on Capitol Hill, and some market
participants are beginning to get nervous.
The Senate put together a procedural vote to pass the bill
in May, but final terms have still not been agreed amid partisan
wrangling over prolonging the tax relief.
"No candidate on either side wants to do anything to give
their opponent any additional ammunition," one housing lobbyist
If homeowners who accept principal forgiveness from mortgage
servicers have to pay tax on that amount, that could well change
the equation for the collateral under RMBS bonds.
The most recent data from CoreLogic showed that 12.7% of US
homes with mortgages - or roughly 6.3 million - are still worth
less than the outstanding debt.
Some owners of those homes would likely walk away from their
properties altogether if they face an additional tax burden,
which would result in more delinquencies - a negative for
bondholders exposed to those loans.
According to data from JP Morgan and MBS Data, a mortgage
analytics firm, more than 43% of all legacy non-agency RMBS
bonds that have been modified involve some principal reduction.
Option ARMs in particular have higher rates of principal
modifications, with 58.9% of their modifications involving a
principal reduction - much higher than the 19.6% level in prime
While many in the market expect that Congress will extend
the bill eventually - and that it will be applied retroactively
- the lack of clarity is creating a headache for some.
"This puts a number of the mortgage servicers in a tough
bind," said one RMBS analyst.
"They may extend principal forgiveness to a borrower but
would be unable to provide any guidance on whether the
modification will be taxable or not."
The lobbyist said the best chance for all tax extenders to
pass would be during the "lame duck session" following the
mid-term elections in November.
Bank of America for its part has already set aside US$490m
to cover any potential taxes borrowers would have to pay if the
bill is not extended.
The move was part of the bank's US$16.65bn settlement with
the US Department of Justice on August 21.
"Until Congress acts, the hundreds of thousands of consumers
we have sought to help through our settlements with JP Morgan
Chase, Citigroup, and now Bank of America may see a significant
tax bill just as they are beginning to see the light at the end
of a dark financial tunnel," Attorney General Eric Holder said
at the time.
(Reporting by Andrew Park; Editing by Shankar Ramakrishnan,
Natalie Harrison and Marc Carnegie)