Tax Considerations for Today's Volatile Mortgage Landscape

May 31, 2024

It is no secret that the mortgage industry is currently in a state of flux. Gone are the historically low rates that produced huge profits for mortgage companies big and small, replaced with rates now resembling pre-COVID. This in turn has cooled off the once-hot home buyer, with the average 30-year rate jumping from3.22% in January 2022 to 7.05% as of May 2024, per Federal Reserve Bank data. With many seemingly having taken advantage of the low rates and refinancing, the market now resembles must-do refinances (think divorce) and possible HELOCs to take advantage of the huge amount of equity people have with the rising home values across the country. In addition, these rising home prices have squeezed out the first-time homebuyer, postponing the American dream for many.

These circumstances have forced many mortgage companies to assess their ability to move forward. Instead of closing their doors, many independent mortgage bankers are deciding that a merger or acquisition would be their best choice. But what are the tax consequences that come with a merger or acquisition?

Do you do an asset sale or a stock sale? Buyers usually prefer an asset sale because they can step up their basis in the assets and potentially avoid inheriting certain liabilities. In addition, the purchase price allocation may provide additional tax benefits through the allocation of the purchase price to specific assets based on the assessed fair market value. Sellers, however, usually prefer stock sales as they can potentially benefit from capital gains treatment. In a merger, companies generally will collaborate and compromise on these opposing options for the best business and tax results.

One tax-efficient solution might be to consider a rollover equity structure. A common example with S corporation owners is referred to as an “S corporation inversion” or “F reorganization.” The shareholders of an existing S corporation transfer their stock to a newly formed S corporation while immediately electing QSub status (i.e., the “old S” is disregarded for federal income tax purposes). If not structured as an LLC, a reorganization can then be performed converting a state corporation into an LLC, which can then enter a transaction with the new merger partner.

And don’t forget about states. Are you going from operating in 15 states to now all 50?What about state licensing issues when a new mortgage company is purchased? What registrations will need to be reviewed and compliance maintained to continue business in those states? Where is the servicing being performed, if any, and will this be a new state for the acquiring entity? In the S corporation inversion example above, the “old S,” which may be disregarded for income tax purposes following the transaction, would be the reporting entity for state operations, including banking, payroll, and benefit plans.

These are just a few of the issues that need to be addressed at the beginning of any type of merger or acquisition transaction in the mortgage banking industry. Consulting with your tax advisor should be top of mind to make sure there are no unexpected consequences or unpleasant surprises when it comes tax time or potential short period filings.

Please feel free to connect with me at the Loan Vision Conference in Chicago in September if you have any questions about this or any other tax issues in the mortgage banking space!

*Any advice contained in this publication is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This publication has been prepared for informational purposes and as general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining from acting, in reliance on the information contained in this publication or for any decision based on it

Marci Stanley

About the Author

Marci Stanley is a tax partner at CohnReznick and has extensive experience in public accounting, providing services such as tax compliance and consulting. Her clients include high net worth family groups, closely held businesses, real estate, and mortgage banking companies. Her industry experience also includes manufacturing and distribution, retail, and various service sectors. Marci works closely with clients to identify opportunities and risks from a federal, state, and international tax perspective on both business and personal matters, as well as advising her clients on various technical issues that might arise.

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