Mortgage firms hoping to execute an MSR sale may only have two to three weeks from today to reap the benefit of existing federal tax rates on long-term capital gains. Today, those rates are lower than those for earned income, but that difference is not expected to continue. If your firm is structured as an S-Corp or something similar, and you have long-term capital gains accrued in your MSR portfolio, you should be considering a tax-advantaged sale now. The after-tax cash savings can be as much as 20 basis points in price on the UPB of the MSR sold. For comparison, that level of MSR value change equates to a 75 to 100 basis point increase in interest rates. 

Earlier this week, PHOENIX consulted a Capitol Hill expert who tracks federal tax matters for the mortgage banking industry. Their views on the matter were as follows: 

  • It is highly likely that there will be an increase in the federal capital gains tax. Specific details about what the rate will be and to whom it will apply are not yet determined. 
  • Most likely, the actual long-term capital gains tax increase will be agreed to in “reconciliation” of the infrastructure/stimulus bill this coming fall, after the spending has been agreed upon and while hammering out the budget for the increased spending  
  • It is expected that the long-term capital gains tax rate change will be effective the day it is agreed to and announced, with little to no advance warning 
  • The current estimate of that effective date ranges from October 15, 2021 on the early end, to November 30, 2021 on the later end 

We present this opinion with the major caveat that the outcomes of the U.S. Congress are always unpredictable, and prognostication about what and when changes will occur is inherently challenging. 

If we conservatively use October 15, 2021 as the effective date of the tax rate increase, any tax-advantaged MSR trade would need to have a sale date of 9/30/2021. This timeline requires a bid date within the next few weeks. Since the Fall of 2020, PHOENIX has been advising clients of the prudent need to consider one or more well-timed, tax-advantaged MSR sales. Time to sell under today’s long-term capital gains tax rate may be running short. 

PHOENIX has the powerful portfolio analytics, nimble and well-informed market valuation capabilities, robust MSR sale activity, and the expert transaction management team to guide and push MSR sales to give sellers the best chance to achieve an on-time settlement. Please contact your PHOENIX representative to discuss in more detail, or leave your name and email below and we will contact you soon.