The agreement preserved two key tax benefits for mortgage borrowers: an exemption from paying taxes on mortgage forgiveness triggered by loan workouts or short sales, and a deduction for certain property mortgage insurance premiums. But the greatest benefit for banks of the "fiscal-cliff" bill, passed by the House late Tuesday, may just be that the economy escaped the tax hikes and spending cuts that would have resulted if Congress had done nothing.
"Had it not passed, I think you could have seen interest rates decline even further, and you could have seen more Federal Reserve intervention to offset, at least to some degree, the effects of going over the cliff," said Brian Gardner, an analyst at Keefe, Bruyette & Woods. "Now that it's passed, economic growth will not be great, but it will be better than it would have been otherwise."
But the agreement was not all good news for the industry. Small banks were unsuccessful in extending full deposit insurance for non-interest-bearing accounts. And with Capitol Hill still falling short of any grand plan to reduce the deficit, observers warned that the true impact of negotiations over the nation's debt problems is not yet known.
"Unfortunately, this bill is only a short-term tweak in addressing a much deeper debate about our fiscal, regulatory, economic, and financial sector future where plenty of work remains for policymakers," said Paul Merski, chief economist for the Independent Community Bankers of America.
One major item left unresolved, some said, is lawmakers failed to raise the so-called debt ceiling, leaving financial institutions potentially vulnerable to the consequences of the government defaulting on its obligations.
"There still remains a huge amount of uncertainty, particularly about how the debt ceiling deadline will be resolved," said James Chessen, chief economist of the American Bankers Association. "You don't want to create a recession unnecessarily, but we still need to eliminate a lot of uncertainty that is really stopping businesses from borrowing today and hiring workers today."
Others said certain tax-related items favored by the industry — such as the mortgage interest deduction — could still be at risk in future fiscal debates as lawmakers look for revenue.
"If we view this deal as a microcosm for what the 113th Congress is going to focus on, it's readily apparent that we are going to have a Congress that looks to close tax loopholes and reduce expenditures, and the mortgage interest deduction is one of the most expensive," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. "Things like the second-home deduction are absolutely on the chopping block and beyond that we should expect other attempts to limit it."
Still, the immediate impact was seen as beneficial.
The package extended through 2013 a law that exempts borrowers from paying taxes on mortgage forgiveness resulting from a modification or a short sale. Analysts had warned that expiration of the Mortgage Forgiveness Debt Relief Act, could have hampered the housing recovery and the success of the $25 billion mortgage servicer settlement announced last February. And the extension of the PMI tax deduction was seen as indirectly lowering the cost of such insurance.
"The biggest deal for banks is the extension of the Mortgage Forgiveness Debt Relief Act," said Edward Mills, a financial policy analyst at FBR Capital Markets. "A number of deals would have fallen apart, and we would have seen renewed stresses on the housing market."
But while many agreed the plan hammered out this week was a net positive for bankers, it left out a key priority for community bankers. Lawmakers failed to extend the Transaction Account Guarantee program, despite a strong push in the lame-duck session to renew the special deposit protection. Some warned that expiration of the program will cause many depositors to take their money out of smaller institutions.
"We would expect many corporate and municipal treasurers to be moving funds in the coming weeks if they had not already acted. … We believe about a quarter of the $1.4 trillion in TAG deposits could move," Jaret Seiberg, a policy analyst at Guggenheim Partners, said in an analyst note on Wednesday. "Long-term that benefits the mega banks and money market mutual funds. Yet the immediate hit to both groups may be negative as there is little loan demand and rates remain depressed."
The fiscal-cliff deal also reinstates a cap on total itemized deductions and personal exemptions for some high-income taxpayers, which could have a muted effect on the popular mortgage interest deduction.
"That is a backdoor way of reducing the impact of the mortgage interest deduction among the top 2% of taxpayers in the country," said Gardner, while noting that the change is "small potatoes" relative to the scope of the overall mortgage deduction.