Are Servicer Advances Deductible Expenses for Homeowners?

Many homeowners get tax statements from entities claiming the right to file them, with an EIN that is problematic. We are having trouble linking the EIN with the name of the entity that sends the tax statement. More importantly or perhaps of equal importance is the question raised by individual homeowners and investors who have purchased multiple residential units and operate them as a business, renting them out as landlords.

Despite my degree and experience in taxation, my knowledge is out of date on this subject. Nobody should take any action based upon this article without consulting a qualified tax professional. This article is for information purposes only. However, I pose the issue for those who do know, to comment on the following scenarios:

First in the homeowner who owns his single family residence but who has stopped paying the monthly amount demanded by the Servicer. In those cases where there are Servicer or similar advances, the creditor keeps getting paid the interest due under the bond agreement even though the Servicer is not receiving the interest allegedly due from the alleged borrower under the alleged note. The interesting issue here is whether the homeowner still owes the money to the creditor under the original note and mortgage agreement. As I have previously outlined in recent days the answer is no, the homeowner does not owe that money to the creditor claiming rights under the original borrower loan agreement. That would seem to be a gain. But the party who made such payments appears to have a new claim against the homeowner for contribution or unjust enrichment even though THAT claim is not secured. Thus, it is asserted, the payments were made on behalf of the homeowner in exchange for a claim to recoup the amounts advanced. Hence the conclusion that since the payments were made, the homeowner may deduct the Servicer advances from his income before paying taxes.

Second is the company or person that bought multiple properties and created a business out of them. The same logic applies. They didn’t make payments to the Servicer but the payments of interest were obviously received by the trust beneficiaries like the scenario above. And like the homeowner they are subject to a claim to recoup the money advanced on their behalf producing a new debt, like the above, that is unsecured. That being the case, they ought to be able to deduct the Servicer advances as business expense deductions from the business (rental) income.

If the entities in the alleged securitization chain or cloud oppose this and want the deduction themselves, then they must pick up the other end of the stick — I.e, that the payments they made as Servicer advances are not collectible from the borrower. Hence all such payments would reduce the original debt due the creditor and would not create a new debt due to the party who funded the Servicer advances. That party might be the Servicer as the name implies or it might be actually paid by the broker dealer who sold the mortgage bonds. Either way the creditor would appear to have received the interest income it was expecting under its deal, as presented by the broker dealer. Hence the trust beneficiary would be getting a statement from SOMEBODY stating that they had received the income for tax reporting purposes.

An interesting litigation question is whether the creditors did receive such statements from one of the securitization parties, and whether it can be discovered which party sent the statement and what EIN they used. An interesting tax and discovery question is whether one of the securitization parties took the deduction after paying the creditor and must now have that deduction disallowed — especially if the Servicer advances were taken out of a pool of money supplied by the creditor, which is most probably the case. It seems unlikely that the Servicer would actually be making such advances in such large volumes (where would they get the money?) and it seems equally unlikely that any other party would be digging into their own pockets to make a payment for which they get a dubious claim against a defaulting homeowner.

Perhaps the most interesting point here is that if the party who actually paid the “servicer advances” contests, they are admitting that the creditor received the payments and if they don’t contest it, they might still be admitting to the receipt of payments by the creditor during the pendency of the foreclosure action. The failure to disclose this in the accounting rendered to the court could be argued as fraud and grounds to overturn the foreclosure action, giving rise to an action for damages for wrongful foreclosure. The argument would be along the lines of no default and the ultimate defense of payment.

8 Responses

  1. Regarding the homeowners income tax in regard to others making RE tax payments on behalf of an entity to which the homeowner is contractually required to repay- why have no CPAS Responded to this or any other issue ever on this blog? I would think Jan can Eck could clear this up with his masterful command of all aspects of this charade. Anyone else?

  2. They should be the same number regardless of paper or online..

  3. What I was looking at are the ones that come by snail mail. It is the copy I take to the CPA to file taxes. We always keep a copy for our file. I promise, the pools are listed and pull up by the RECIPIENT ID# !

  4. AB- are these EINs or codes consistent between the online 1098 and the paper version received in the mail? And do you know anything about “substitute 1098s which I have also received by snail mail. Thx

  5. That is exactly what I am saying! Use the recipient Id# found on the 1098 they send you and you will find the security pools for each year. I wondered why they were different from year to year and that is ties back to the various pools!

  6. AB:

    Are you saying the 1098 issued will help identify the :securitized trust” to which the loan was purportedly sold after origination?

  7. Neil,
    When I did my 2012 taxes on TurboTax, for the 5th year, and entered the info for my mortgage interest deduction, for the first time I was asked”servicer, not lender, correct”? This question popped up after I brought up the name of the entity who I pay.
    Please speculate on the possible ramifications of this tidbit.

  8. I don’t know if this will help you or not but another homeowner recently pointed this out to me. If you take the 1098 sent to the homeowner and key in the RECIPIENT ID# into the SEC website it ties back to the investment shows you the securitization pool for that year. I have gone all the way back to the origination following the pools for each was an eye opener!

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