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

tax, tax deductions, homeownershipWhen 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.

About Author: Rachel Williams

Rachel Williams attended Texas Christian University (TCU), where she graduated Magna Cum Laude with a dual Bachelor of Arts in English and History. Williams is a member of Phi Beta Kappa , widely recognized as the nation’s most prestigious honor society. Subsequent to graduating from TCU, Williams joined the Five Star Institute as an editorial intern, advancing to staff writer, associate editor and is currently the editor in chief and head of corporate communications. She has over a decade of editorial experience with a primary focus on the U.S. residential mortgage industry and financial markets. Williams resides in Dallas, Texas with her husband. She can be reached at [email protected].

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