Officials warn of mortgage fee bill effects

By Stephen Cameron

Plenty of folks in Riley County are confused, angry and struggling to see any reason for a proposal to eliminate a fee on mortgages.

Riley County counselor Clancy Holeman was so adamant about the possible perils of the measure, known as Senate Bill 298, that during a phone interview in which he was trying to explain the consequences, he ignored a screeching fire alarm at his home.

Holeman quickly said, “I’m not in flames, don’t worry” – and proceeded with his argument with barely a pause.

The bill, which has passed the Senate and could reach a House vote before the end of this legislative session, would phase out mortgage registration fees on real estate transactions.

Some background: The mortgage fee of $126 for every $100,000 borrowed to buy real estate has been around since 1925.

If the bill passes, borrowers would get a break – but the state’s 105 counties could face a revenue shortfall that the Kansas Registers of Deeds Association has calculated would be in the range of $50 million.

Shilo Heger, Riley County deputy treasurer, confirmed a number that first surfaced at a county commission meeting. Heger estimated that if SB 298 were to pass, it would cost Riley County about $1 million in annual revenue.

To put that number in perspective, overall county revenues in 2012 were $74.1 million.

The county’s general fund had a little over $5 million in reserve at the end of 2013

Commissioner Dave Lewis, one of many officials in this region who opposes the bill, said that if the county lost $1 million in revenue, the only two options would be cutting services or raising taxes.

“And our constituents don’t want to do without their amenities,” Lewis said, making clear that passage of SB 298 almost certainly would mean a tax hike.

OK, then, who is so fired up to remove a fee that has existed for 89 years without much of a challenge?

And why?

The bill was introduced on behalf of the Kansas Bankers Association and the Kansas Realtors Association — based on the argument that the mortgage registration fee is a hidden cost that unfairly burdens home buyers who borrow money, and acts as a disincentive toward purchasing real estate.

“That’s ridiculous,” Holeman fumed. “I defy anyone to picture a family or an individual buyer picking out a home, agreeing on the price, then sitting down to finish the closing and suddenly saying: ‘What’s this mortgage fee? I won’t pay it. We’re leaving the table.’

“Just trying to visualize that is crazy,” Holeman said. “They’d not only have to go find another home, they’d have to leave Kansas to do it.

“The proponents’ argument isn’t even realistic. It’s just fantasy.”

Some bankers don’t see it that way.

“We applaud the efforts of the Senate Assessment and Taxation Committee for tackling this important policy change,” said Chuck Stones, president of the Kansas Bankers Association, in a prepared release.

“SB 298 will level the playing field for all Kansas residents purchasing real estate.”

In an effort to make the bill more palatable to county officials who have objected so loudly, the Senate added language that involves phasing the fee out over five years rather than doing it all at once.

To offset lost revenue, proponents introduced the idea of phasing in $4-per-page increases in fees for documents filed with county recorders of deeds.

Kurt Knutson, CEO of Overland Park-based Freedom Bank and president of the Kansas State Bankers Board, wrote this in an editorial for the Kansas City Business Journal:

“This (mortgage registration fee) is simply a “gotcha” tax on the unsuspecting consumer. It grows with the amount of the mortgage, with no relationship to the actual costs associated with recording the document, and nearly all of the money goes into the general fund.

“Johnson County is particularly affected by this because most bordering states, including Missouri, have no mortgage registration fees.

“Increased upfront mortgage costs hurt new home sales, resales and business investment in our local trade area, which is counterproductive.”

It might be instructive that Knutson is from the Kansas City area, because there is a suspicion in some quarters that a key reason for the generating bill is to make Kansas more competitive selling property in its long-standing economic “Border War” with Missouri.

“This thing really isn’t about residential property,” suggested longtime Manhattan area Realtor (and former mayor) Loren Pepperd.

“Look, 60 percent of our member Realtors are from the Kansas City area, and they want to stay competitive in getting commercial business.

“The fee is relatively small and harmless to a residential buyer, but imagine what the numbers might be with a huge commercial property.

“And we know how committed Gov. (Sam) Brownback is to bringing business to Kansas — especially in competition with Missouri in Johnson and Wyandotte counties.”

Even as a member of the Kansas Realtors Association, however, Pepperd claims he sees enough potential damage to individual counties that he can’t find the heart to champion this bill.

“Personally, I’m in favor of keeping the fee,” he said. “I feel for the county, and what the fallout from this could be, I really do.”

Back to motive: Can the governor’s desire to make Kansas more business-friendly actually be the true driver behind SB 298?

“I can’t come out and say that has nothing to do with it, because it really might be a factor,” said Rep. Tom Phillips (R-Manhattan), who opposes the bill.

“Loren’s in touch with the Realtors group and he may know more than I do.

“Plus, sometimes we don’t get all the information on these things from the leadership because they might know we’d have difficulty supporting or explaining their agenda.

“But on the other hand, I have trouble seeing the governor wanting to do this politically. He’s probably going to have a pretty even split around Kansas City in his race with Paul Davis this November, so he really needs to win big out in western Kansas — and this bill would damage those smaller, rural counties out west more than anyone.

“They don’t have the tax base they can tap to replace the money without a lot of difficulty.

“It just seems odd in a political sense.”

One area where Phillips clearly agrees is the result Kansans will see if the bill passes and mortgage registration fees are eliminated.

“Property taxes will go up,” he said. “They’ll almost have to, with counties losing so much revenue.

“So in reality, this would just shift the tax – you’d pay it one place instead of another.

“And for current homeowners who have already paid the fee at closing, they’d actually wind up paying it again in the form of a tax.

“What’s the point of that?”

That’s the question vexing so many people, and most definitely worrying county officials who would incur a sudden shortfall—and react to it almost immediately.

“It makes me nervous from the county’s standpoint,” Phillips said.

“Whatever the reasons the bankers or anybody else might have for getting rid of the mortgage tax…

“Out here in Riley County there will be serious collateral damage.”

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