The Impact of Tax Simplification on Mortgate Buyouts

Abstract

Whenever current mortgage rates are substantially higher than previous levels, mortgage lenders may find it attractive to extend to the borrowers a special opportunity to prepay all or part of the mortgages. The purpose of this paper is to identify the important issues in the buy‐out decision, analyze how buy‐back proposals might work using representative mortgages dating back to 1961, and to evaluate how current tax reform proposals will affect the buy‐out process. The empirical analysis demonstrates that only the lenders in the highest tax brackets would find such buy‐out programs profitable, while it is the borrowers in the lowest brackets that would find buy‐outs most attractive. The lack of lenders with high marginal tax rates and the lack of wealth by borrowers with low marginal rates suggests why such buy‐out programs have not been popular in recent years. The analysis of several recently proposed tax plans indicates that buy‐out programs should become more popular in the future, especially at such times as mortgage rates begin to climb again.

Citation

Woerheide, W. and Marquardt, J. (1986), "The Impact of Tax Simplification on Mortgate Buyouts", American Journal of Business, Vol. 1 No. 2, pp. 47-54. https://doi.org/10.1108/19355181198600014