Fannie wins tax fight over losses

Fannie Mae, the biggest buyer of mortgages, won a two-year fight Tuesday against the IRS to make losses in its loan portfolios more valuable from a tax standpoint, a victory that may be bolstered by legislation now before Congress.

The Internal Revenue Service withdrew proposed regulations that asserted that mortgage loans are capital assets and any losses from them could be used only to offset capital gains. The agency also said it wouldn’t challenge companies that count such losses against ordinary income.

The action clears the way for Fannie Mae, Freddie Mac and other buyers of defaulted loans to benefit from the pending tax legislation. The measure would allow companies to use losses realized this year to get a refund of taxes paid in the four previous years, when profits were surging.

Though Fannie took the lead in opposing the rule, the IRS decision would benefit Wall Street firms and other investors that have billions in mortgage losses piling up on their books. Seventy of the world’s biggest banks, securities firms and mortgage companies have taken $290 billion in asset write-downs and credit losses since the start of 2007.

As the nation’s two biggest mortgage investors, Fannie and Freddie both posted record mortgage losses during the fourth quarter.

Fannie Mae and Freddie Mac own or guarantee more than $5 trillion in U.S. mortgages, about 45% of the market.