Understanding the Effects of Tax Changes on New Originations


In November and December 2017, Congress passed a sweeping tax bill. The new tax code it creates will have multiple effects. Consumer behavior will be affected by the perceived benefits and drawbacks of the plan across the board.

Will new originations be affected? While many factors affect origination rates, it’s possible to itemize the elements of the new tax changes that might cause increases or decrease in new originations for mortgages and student loans.

Mortgage Originations

Mortgage originations are likely to be affected by several provisions in the new tax bill. Historically, homeowners have been allowed to deduct both mortgage interest and property taxes. These provisions can make home ownership more affordable and more attractive as an investment.

After some differences between House and Senate versions of the bill, the new tax changes will retain deductions on interest up to a mortgage amount of $750,000, which is down from the previous $1 million limit. This change is unlikely to have any impact on mortgage originations.

But there are two new provisions which may have an impact.

The first is the paring down of allowable property tax deductions. Currently, homeowners can deduct all property taxes, state and local. Once the new tax changes go into effect, property tax deductions will be capped at $10,000. Over 4 million Americans pay more than this amount each year.

The cap might also have a limited effect on mortgage originations, causing neither an increase or decrease. But it also may make obtaining a mortgage less desirable to consumers, particularly in high property tax states such as New York, New Jersey, and California. If it does, mortgage originations may drop.

The second is the change in the standard deduction. The new tax bill doubles the standard deduction. This is anticipated to cause fewer people to itemize when tax filing time comes in 2019, for 2018 income. One has to itemize to deduct mortgage interest. Some observers feel that people will be less inclined to itemize and thus less likely to be incentivized to want a mortgage deduction. Renting may see an uptick, and mortgage originations a downswing, as a result.

Long-Term Impact

There are potential longer-term effects from the new tax bill as well. Although opinions vary, some observers feel that any legislation that makes homeownership less attractive, especially in the high property tax states, may lead to a drop in housing prices overall.

Rising or stable housing prices have an effect on the mortgage origination market. Homebuyers often see rising or stable equity in their existing homes as an impetus to trade up. If their home prices fall, mortgage originations for trade-up homes may drop as well.

Other observers blame mortgage and property tax deductions designed to foster home ownership for driving up housing prices, making home ownership unaffordable for some. Since these provisions are largely retained, it remains to be seen if they alone will cause any changes in originations. And it certainly remains to be seen if the relatively minor changes under the new tax law will cause changes in housing prices.


Student Loans

Like mortgages, student loan originations may be affected because of the new tax plan’s effect on consumer behavior.

Despite much early wrangling and initial plans that called for repeal of the ability to deduct student loan interest from taxes, the plan ultimately saved the ability to deduct up to $2,500. That provision is unlikely to change the amount of student loan originations.

Nor is the tax status of graduate students receiving tuition waivers in exchange for serving as teaching or research assistants likely to change the number of originations. In early versions of the plan, the money value of tuition waivers would have been counted as income. The resulting impact on tax liabilities might have caused student loan originations to go up, as students would have been paying more out of pocket for taxes. However, ultimately, those plans were scrapped and tuition waivers will not be counted as income.

Long-Term Implications

The longer-term implications of the tax plan might affect student borrowers and their parents, however. In general, the current administration and Congress look favorably on private loans rather than government-sponsored ones. Under earlier administrations, government-sponsored loans have had more favorable terms, which has been among the factors spurring a rise in student loan originations over the past decade.

Student loans with private lenders, however, tend to have higher interest rates. The higher rates may make the loans less affordable initially, and less attractive to potential borrowers. The emphasis on private lending, then, may be a boon to private lenders but also cause an overall drop in student loan originations.

The new tax plan will have multiple effects on mortgage and student loan originations.

Optimizing Loan Portfolios

New originations rise, fall, or remain stable depending on many factors and multiple consumer decisions. No matter what occurs, lenders need prudent planning to ensure the continuing strength of their loan originations.

Prudent lenders will join with experienced partners to decide on loan sales and acquisitions that will ensure strong portfolio results.