Moody’s In-Depth: Impact of Tax Credit on Mortgage Loans

When new tax legislation was passed late last year, many in the industry opposed it, fearing it would hamper homeownership. In a new analysis, Moody’s Investors Service is doing a deep-dive into whether these fears were founded.

According to Moody’s, the Tax Cuts and Jobs Act of 2017 decreased the tax incentive of homeownership by 1.61 percent from 1.67 percent to 0.06 percent for a family earning $150,000 annually in a high-tax state.

However, though Moody’s found that the legislation greatly reduces the tax benefits of homeownership, the impact on residential mortgage credit performance in the near-term will be neutral.

“To be sure, families make decisions to buy or rent based on more than just financial considerations, taking into account factors such as where they want to live and whether rentals are available in their desired location. Furthermore, financial considerations can become even less important in environments, such as the current one, where there is a relatively limited supply of homes for sale. In fact, the tax law’s grandfathering of interest deduction limits for existing mortgages of up to $1 million (which falls to $750,000 under the new law) may further reduce supply in certain markets by dis-incentivizing sales by existing owners with outstanding mortgages greater than $750,000,” Moody’s reported.

According to Moody’s, the higher after-tax incomes that many Americans will now experience will also offset the direct impact of losing homeownership incentives. To illustrate this, Moody’s ran the data on a sample family, where the joint, married income is $100,000 in a low tax state. Homeowners like this can expect to see their after-tax income rise by 2.2 percent.

With this greater access to disposable income, Moody’s predicts the tax changes will drive a modest positive for the performance of non-mortgage consumer credits—such as in the auto and credit card markets. Overall, however, these markets will continue to weaken largely due to weakening underwriting standards which have seen delinquencies and charge-offs start to rise.

Moody's subscribers can access the full report by clicking here.