What the new tax law means for lenders, borrowers

A sweeping new law, branded as a pillar of President Trump’s second-term agenda, carries significant implications for the housing market, from affordable housing to investor tax breaks. Within the colossal 870-page package are a number of changes that have won applause from many in the housing industry.

“These provisions form the backbone of the real estate economy — from supporting first-time and first-generation buyers to strengthening investment in housing supply and protecting existing homeowners,” said Shannon McGahn, NAR’s executive vice president and chief advocacy officer, in a press release.

Mortgage companies also stand to benefit from many of the law’s tax changes, according to Isaac Boltansky, managing director and head of public policy at Pennymac.

“While there are clearly broader macro concerns worth debating, the mortgage policy elements of this package are, on balance, clearly constructive,” he said in a statement.

So what are some of those elements and how will they affect lenders and borrowers?

Low-income housing credit gets a permanent boost

The law permanently expands the low-income housing tax credit (LIHTC), a program that gives tax breaks to housing developers in exchange for building affordable housing in low-income areas. Supporters say that the tax credit is an important way to encourage building affordable housing in areas that most need it. The new law tweaks the tax credit by increasing the 9% allocations and dropping the financing threshold for certain bonds to 25% from 50%.

“These measures will increase the number of projects that qualify for the tax credit, boosting demand for HFA multifamily lending and bond financing,” said Omar Ouzidane, VP-senior analyst at Moody’s Ratings.

Mike Calhoun, president of the Center for Responsible Lending, believes it could lead to the construction of half a million new affordable rental units over the next 10 years.

“I think it is an important bipartisan provision, and it’s the most positive part about the bill in terms of housing,” he said.

Phil Crescenzo Jr., vice president, southeast division at Nation One Mortgage Corporation, believes that the new tax credits won’t just spur more home building, but that those cheaper units could also bring down prices for similar homes in the area, even if those homes weren’t built with the credits.

“I can see sellers dropping their prices to compete,” he said. “I can see that setting the bar in certain counties or towns.”

LIHTC has its detractors, though. Edward Pinto, co-director of the American Enterprise Institute’s Center on Housing Markets and Finance, argued that the credit will do little to increase supply of affordable housing. He described the program as costly and complex, and said that in some cases, the subsidies end up being used to build housing that would have been built anyways.

“When a Low Income Housing Tax Credit development gets built, they never focus on what didn’t get built because of that,” he said, arguing that LIHTC developments often “crowd out” other unsubsidized construction that would be built for less.

SALT cap hike could offer relief for high-tax states

The law includes several key tax deductions, but for homeowners, the SALT cap increase is one of the most significant. Previously, tax payers could only write off a maximum of $10,000 in state and local taxes from their federal tax returns. Now, that cap has moved up to $40,000 per year.

This is a major win for homeowners, especially those with large homes and who live in states with high property taxes, like New Jersey, Illinois, and Connecticut. In New Jersey, for instance, 40% of homeowners pay more than $10,000 a year in property taxes. Those homeowners could see some relief if they decide to take advantage of the higher cap.

It’s unclear how much this will benefit new buyers, though. The deduction could help consumers looking to buy in more expensive areas by offsetting the high property taxes, but it doesn’t necessarily make the homes more affordable. That’s because it doesn’t change an applicant’s pre-tax income, which is what lenders care about most.

“The debt-to-income ratio is based on pre-tax income,” said Pinto. “So whether you have a SALT deduction or don’t have a SALT deduction has no bearing on your pre-tax income.”

The law offers a number of tax breaks for mortgage borrowers, including permanently cementing the $750,000 cap on mortgage interest deductions and bringing back a deduction on mortgage insurance premiums. While neither of these measures are new, they could add stability and certainty for buyers looking to save money on their home purchase.

Bonus depreciation returns for investors

The law also makes permanent the bonus depreciation rule, which was originally set to sunset at the end of the year. This tax provision allows investment property owners to frontload 27 years worth of property depreciation in the first year. Ryan Grant, president of retail lending at NEO Home Loans, said this is a useful tool for wealthy real estate investors.

“They’ll buy a property every year, they’ll bring forward the depreciation, and so they effectively will never really pay taxes,” he said. Owners can then reinvest that money into new properties, repeating the cycle.

New law introduces uncertainty ahead

The law is less than a week old, and its impact on housing is still unclear.

While the law doesn’t directly affect mortgage rates, Pinto is optimistic that the bill will bring economic growth and more revenue for the federal government, which he believes can lead to lower mortgage interest rates. He concedes, though, that there’s a “50-50 chance” the opposite could happen.

“I don’t make predictions about interest rates,” he said. “All I know is that if the market believes that there will be greater economic growth, and if the market believes that will lead to smaller deficits, it will accept lower interest rates.”

Another open question is the law’s immigration angle. The package includes $170 billion to fund President Trump’s deportation efforts, and it’s not clear how this will affect the housing market. Analysts like Pinto argue that large-scale deportations could free up some rental supply. Others worry that deportations will drive up home prices by forcing many of the cheap, undocumented workers that often work in construction to leave the country at a time when those workers are badly needed.

“There is a labor shortage, and so if you lose a major chunk of that workforce and you can’t fill the current vacancies, it is a big deal,” said Calhoun.

The biggest upside of the law may not be the tax changes themselves as much as the tone it sets for the industry. Crescenzo said that the attention that the legislation pays to housing gives him comfort that there will be stability in terms of taxes and regulation.

“It shows that for a long period of time, the government’s going to invest and be an advocate for more affordable housing, for moving investments into that sector,” he said. “So it eases concern.”