Deductibility of Mortgage Insurance Premiums Conference Call 

Corey Carlisle provided a brief overview of the legislation and clarified that the law applies to mortgage insurance policies written in 2007 (i.e., loans originated in 2007).  Tax deductibility does not extend to premiums paid in 2007 on policies executed prior to 2007.   Given that MI policies are not renewable on an annual basis, there is no opportunity for a homeowner to deduct premiums on preexisting MI contracts. 

Acquisition Indebtedness

Corey clarified that both purchase money and certain refinance loans are treated as “acquisition indebtedness” and defined as deductible qualified residence interest under section 163(h)(3). However with regard to refinances, a refinance of the existing indebtedness is treated as “acquisition indebtedness” up to the amount of the indebtedness being refinanced.  There was a question about how borrowers would treat MI premiums that represent the “cash out” portion of a cash out refinance. 

Who Reports? 

There was discussion on what entity is required to report to the borrower and to the IRS, the mortgage servicer or the mortgage insurer.  The law does not really answer the question.  Problems are likely to surface regardless of who reports.  If the lender reports, it will not know what amount of single premium MI or upfront FHA MIP should be allocated to the 2007 year.  If the insurer reports, the insurer will not know what premiums were paid by the borrower versus those paid by the servicer on behalf of a delinquent borrower.   In either case, it would be up to the homeowner to drill down to that level.  Many concluded that servicers are going to be stuck with the responsibility to report this information (especially with regard to FHA, VA and RHS) even though it would be easier and more economical if the insurers were responsible for reporting because there are only a handful.   The members supported MBA efforts to impose reporting requirement on the insurers. 

Special Assessments 

One member asked how to treat special assessments on insurance policies that are imposed in Florida, West Virginia and Kentucky.  Is this special assessment deductible and, if so, is it to be treated as interest?  The group came to the consensus that if the special assessment was included in a mortgage insurance premium and not broken out, then it would be considered the premium and deductible as interest.  If it was broken out, the group was unclear as to treatment. Vicki Vidal asked if there was concern about how servicing systems will pick up upfront premiums paid by the originator.   Servicers indicated that contracts vary today on the treatment of interest paid at closing and will like vary on reporting of premiums.  Some originators are going to be required to issue a 1098 on premiums paid at closing.  In other cases, the servicer will report both the premium paid at closing and future premiums paid on a monthly or annual basis.

Reporting on the 1098

The question was raised as to whether the IRS will change the 1098.  The group needs to know what if anything will be changed or added to the 1098 form and what changes if any will be required to the tape that goes to the IRS at the end of the year.   Someone asked whether MI premium are interest, thus not requiring a separate box.  The law is written so that MI premiums are considered interest and as a result MI premium could be included in the interest box on the 1098.  Servicers, however, wanted a breakdown or separate field for interest and MI premiums because inevitably borrowers will want this level of information and providing such information to borrowers will cut down on customer calls.  Some servicers were interested in distinguishing between upfront premiums and annual/monthly premiums.  Servicers discussed that they would flag loans originated in 2007 with MI.  Two questions surfaced on when the servicer must report to the borrower and to the IRS.  The law states that the Secretary of the Treasury “may issue regulations that any person who, in the course of a trade or business, receives from any individual premiums for mortgage insurance aggregating $600 or more in any calendar, shall make a return with respect to each such individual.”   What is the trigger, receipt of premiums by the servicer or receipt of the premiums by the insurer?  There were no concrete resolutions to these questions.  The other question was whether the $600 reporting trigger applied to the combined interest and MI premiums, or whether interest and premium are each subject to the $600 trigger.  The law references “individual premiums for mortgage insurance aggregating $600 or more for any calendar year.” The definition of “mortgage insurance premiums treated as interest” is defined as “premiums paid or accrued  for a qualified mortgage insurance by a taxpayer during the taxable year in connection with acquisition indebtedness with respect to a qualified residence of the taxpayer….” The reference to premiums “accured” raised considerable confusion. There were some in the group that thought such reference was due to the fact that some taxpayers may be on an accrual basis.  Others thought it was intended to allow deduction of premiums collected by the servicer, but not paid to the mortgage insurer.  Clarification from the IRS is needed.  

Lender Paid MI

There was a question on whether lender-paid MI is deductible for the mortgage lender or borrower.  The group concluded that it would not be deductible for the borrower because the borrower did not make the payments and not deductible for mortgage companies since the act applies to individual taxpayers with qualifying residences. 

Reporting to the IRS  

An important question was whether servicers will be asked to report to the IRS or asked only to report to borrowers.  All favored reporting only to borrowers.  The law appears not to require reporting to the IRS unless the Secretary of the Treasury issues regulations calling for such reporting.   Since this is a temporary deduction, MBA’s position should be to object to reporting to the IRS for this year, or until such deduction is permanent.

Applicability to VA and RHS

There was discussion about whether the law applies to VA and RHS guarantees.   The law references mortgage insurance provided by VA and RHS, but those entities do not offer insurance but rather provide guarantees.  The industry believes that the spirit of the law covers these guarantees, but the agencies are currently seeking IRS opinions on the matter. 

Treatment of FHA insurance and allocations

Another unfortunate provision of the law states that only those premiums allocable to the 2007 year are deductible.   An exception from this allocation is made for VA and RHS “insurance”.    The exclusion of FHA from this exemption means that only part of the upfront MIP can be allocated to 2007.  Lenders do not know how to calculate this.  Servicers want MBA to support allowing full deductibility of FHA’s upfront MIP in the year of origination.  Alternatively, servicers recommend a 3-year amortization of the upfront premium to coincide with FHA’s MIP refund policy.   FHA refunds originally were subject to a 7-year factor, then reduced to 5 years and now refunds are available only for 3 years from origination and only when the borrower refinances into another FHA loan.  

Refunds 

On a related note, several servicers raised the issue of how to handle PMI and FHA refunds.  One lender stated that when the loan prepays with single-premium insurance, the borrower may be entitled to a partial refund.  Another lender indicated that in FHA streamline refinances the premium refund gets applied to the new loan.  Servicers expressed concern that they do not know how to treat such refunds and credits and will have a hard time properly accounting for them in this context.  There was a belief by some that servicers will only need to account for refunds if the IRS issues regulations requiring it.   This is unclear. 

Other

There was a question as to whether there are borrowers with monthly MI premiums that are not escrowed – possibly supporting the argument that MIs are in a better position to report.  The group indicated the number would be very small if there are any. The meeting concluded with a description of the phase out provision and a consensus opinion that servicers would only report the gross amount of premiums paid to the MIs.  The borrower would have to determine his/her phase-out responsibility.