If I may, “the IRS will go along” is a concept. My “job” is to explain to anyone who cares that what this really means is that to the extent that statutory changes are required (they are, big time), it’s up to Congress, not the Service, and to the extent there are regulations to be issued, you have NO idea how long it takes to issue those things, publish them in the Federal Register, and so on.

I’m not saying this stuff can’t get done, I’m saying that…if you’ll forgive the testosterone…

(and I think this is what you’re getting at yourself)

In the Tom Clancy novel “Clear and Present Danger,” but not the film, Jack Ryan’s rescue of the US soldiers captured by the drug dealer involves the use of Coast Guard ships for operation of VTOL aircraft.

There’s a funny chapter in the book where Ryan lands on the ship and explains to the Captain all the grand scheme of how they’ll land the aircraft on the ship, then take off and so on.

After he’s finished, Ryan says to the Captain, “So what do you think?”

The Captain takes the pipe out of his mouth and says, “You should have checked the weather.”

(A huge hurricane was approaching.)

Im just saying.

In concept, the problem is that we have a tax and legal system that revolves around “realization” and federalism and to imagine how nice it would be to exchange A for B has to be matched with the reality of “and where do the taxes go and how do we make sure state laws are not implicated and we don’t accidentally break something important.”

Remember, or you tell me you’re more into this stuff in some ways, CRA pressure is considered instrumental in the “innovation” that allowed this toxic mortgage crap to get done…(the Community Investment Act, kind of “encouraging” [like Tony Soprano would] banks to make loans in bad areas])

The Law of Unintended Consequences.

Here’s another example, a la ABK:

The reason “only” $3B MAY be enough (not to me, IMO the ratings agencies are stupid AND whores) is because they need enough capital to have loss coverage ratios relative to their expected losses, which are low in muni land, at least in recent history.

However, this little bit of capital here changes the total balance sheet values of assets by hundreds of billions???

That’s because of a multiplier effect, where each market participant (particularly institutions like insurers who hold muni bonds but can hold only so many if theyre not rated AAA) has to revalue according to a very different formula…

In other words, you thousands of market participants suddenly downvaluing or forced selling all kinds of stuff because of this one change.

See, an investor holding $1B of these munis, say all of one issue, now A instead of AAA, has to revalue them down by, perhaps, $100M…

And 1000 of those investors makes this a $100B writedown all for the want of $3B in capital.

That’s because they’re not writing down by an increment in loss expectation due to the rating drop from AAA to A (assuming a bust monoline) whereas the monoline needs only $3B to avoid downgrade?

This is idiotic, but its because the holders of the munis are not able to use a correlation model to aggregate their loss expectation, whereas ABK is.

It’s much more complicated than this, and I’m a life actuary not a bond actuary (whatever that is), but you get the point.

So now we have a system where owners of ABK can hold a gun to everyone’s head and say, “We all know that munis don’t default hardly ever, in fact our profit margins are 50%, way higher than MSFT ever dreamed of, but if we go down then everyone goes down 100x worse, so give us money and let us keep upstreaming our dividends and paying ridiculous salaries we don’t earn or…”

Remember the National Lampoon magazine cover, “Buy this magazine or we’ll shoot this dog?”

This is all very helpful, one of my continuing frustrations in covering these topics is that most of the discussions are at 30,000 feet. Although I am not at all an expert in this area, it’s pretty obvious that messing with structured credits is a non-trivial activity, yet everyone acts as if this can be made to happen by fiat.

I think the unspoken assumption is (to the extent anyone considers details), of course, the IRS will go along, it’s part of the Treasury and since OTS is also trying to push these ideas along, any IRS rule changes will automagically happen. No one considers that that will require a good deal of thought and crafting so as not to create unintended consequences.

First of all, I’m a quantitative tax and securities lawyer and not a RMBS/REMIC lawyer so I don’t claim mastery and I can make mistakes believe me but…

REMICs, to preserve their tax status, have to operate within rules. To the extent the trust is off balance sheet, accounting standards (this is the Q stuff) require the trust to operate within certain rules.

The two sets of rules certainly overlap, but they arent identical sets.

Generally, the Q rules require that the trust be run “brain dead,” meaning that the trustee (and delegated servicer) must only operate mechanically as provided in the trust documents.

The SEC flap is on the issue whether approving workouts for loans that appear to be in trouble, particularly but not exclusively where there is no such language in the PSA (trust document), is too far removed from “brain dead” and thus is active management and therefore destroys the Q election and the stuff must come back on balance sheet.

INDEPENDENTLY of this is the 1,000 year old (ok 800 but close enough) concept of fiduciary duty…when anything discretionary is done by a trustee it had better be done with utmost fidelity to the ultimate beneficiary. When there are beneficiaries with adverse interests (income vs gain, present vs remainder), its litigation bait.

Arguably (but falsely, I promise you), the idea here is that if ASF says “everyone does it or can do it,” somehow that overrides both the accounting Q issue and the state law fiduciary issue.

The FASB would argue otherwise. They don’t even want to maintain SIV status.

So would most state court judges, who won’t like or accept the idea that because some flacks said its ok then its ok and they have nothing to say about it.

NONE of this has anything to do with REMIC tax law.

REMICs are not supposed to be buying and selling assets except in rare cases as required by non-discretionary workouts. To allow REMICs to do this would require changes in tax law too.

Any REMIC operator who went along with this without a change in tax law or a PLR or some clear proof that the Service will not come in and squish him would be insane, as the tax liabilities that would spring up would (you knew this was coming) be a breach of fiduciary duty.

As I said, we can agree on what’s desirable, but so much would have to be done that by the time it got done it probably wouldn’t matter anymore.

Perhaps if you have to do own to rent the only way thats workable is to create a quasi GSE that buys the loans and keeps the risk of gain and loss and passes back to the loan seller not only the purchase price of the loans but the rent, which gets a surgical amendment to the tax code to allow the receipt of such rent not to be “rent” such as would destroy the REMIC status but to be deemed “interest” on the loan it no longer owns.

SOMEONE has to consider the implementation details.

Of course, such an entity would be one giant real estate landlord company.

Call it a WPA.

Incidentally, I made another post on CR going on at length about the tax consequences to the REMIC or to its holders on sales like this…

Not pretty.

Again, massive work to amend the code if that’s what you’re going to do, but ask yourself this:

(a) where does the loss go? obviously there’s a loss recognized on sale of the loan. normally gains and losses go to the residual piece but that was not contemplated for this stuff as this stuff was not contemplated on this scale.

(b) is the “new loan plus certificate” received a single or bifurcated instrument?

(b)(1) if its a single instrument, then its a contingent payment debt instrument and some tranche holder is going to wind up picking up phantom income (an unfunded tax liability).

(b)(2)(a) if its a bifurcated instrument, there is simply no precedent for treating that certificate as equity, it would almost surely be considered by itself a zero coupon contingent payment debt instrument; see above for the mess it creates (in your terms, it would be a zero coupon [balloon] shared [100%] appreciation mortgage)

(b)(2)(b) otherwise, if it is equity, who gets the gain (remember, in REMICs, gain goes to the residual, but in this case that gain economically should belong to the income tranche holders)

furthermore, i GUARANTEE you there are many states (Florida i think being one) which would not allow the recordation of this if it were not presented as a mortgage…and if it were, then you’ve got that annoying phantom income contingent payment debt issue again

and

who decides when to sell it (remember theres supposed to be a market for these things)

so all REMICS are now actively managed REITS?

theres taht pesky fiduciary duty issue again.

Do you agree that theres a lot here thats clearly beyond the intellectual ability of a lot of the people proposing it to think through before they shoot their mouths off (I’m not talking about you, but about the ones proposing these things)?

Any transaction which leaves the homeowner a renter de facto in that the risk of loss is removed and all possibility of gain is removed is arguably a realization event.

If this program brings in serial refi’ers then some of them no doubt have cost bases lower than fmv, so they get to pick up the gain? I realize there’s a capital gain exclusion but still…

The devil is alwyas in the details (ps by SO FAR better i meant so far to date based on whats been run up the flagpole, not that its SO MUCH better).

Agreed that both the negative equity certificate and the “own to rent” concept are in the land of “waive a magic wand.” I guess my comment that I regarded it as a “grand scheme” wasn’t clear enough.

However, per the Hope Now Alliance plan, this Administration takes the view that they can do that, that if Treasury backs a program, that gives servicers enough headroom to beat back legal challenges (that is, if Treasury and the American Securitization Forum agree to something, it has some legal standing. I’ve been shocked that the press has treated that assertion with a straight face).

Of course, Hope Now was also so narrowly drafted as to limit it to circumstances in which it could be argued that the rate freeze wasn’t a worse outcome for investors. Presumably plans could similarly be sufficiently tailored under these concepts if anyone cared to (but as Tanta suggested, by the time anyone figures that out, the mortgage crisis will likely have passed…..)

Oh, and your comment made me realize something I hadn’t considered…..those negative equity certificates would probably need to be recorded locally. Otherwise it might be possible to effect a title transfer without satisfying it.

Then de facto, rent control operates as a substantial restraint on alienation with respect to the fee owner.

I live in NYC too. You ever TRY selling a rent controlled (more likely stabilized) apartment building? They come with huge plant issues as owners have little motivation for capex (unless it puts the apartments over the destabilization threshold, but let’s not put everyone to sleep).

I agree with you that if we “have to do something” then anything that leaves the USE in the current owner but the ECONOMIC BENEFIT (gain/loss) with the screwed over lender is better, sure.

I just don’t see anyway to make this work in this legal system without depression-era emergency Congressional preemption.

Even the New Deal didnt happen overnight.

Speaking of which, is setting the rent on the home within Congressional power?

Is it any different than setting wage and prices on chicken processing (cf NRA, Schechter, and US v. Lopes).

Federalism is NOT dead and the idea that new entities will somehow acquire mortgages from REMICS and short refi them and become landlords is…

And if it’s not done that way, tell me how REMICS, which are creatures of state law, get told (assuming any of this happens in the first place) how to rent stuff out…

By covenant running with something?

But then there’s that pesky federalism issue again.

Basically, our politics are different, but we agree on this being SO FAR better than other bad ideas…

I just don’t see any way it works legally.

Have any of you lived in rental home? The landlord does not pick up the garbage for you. When I was growing up, due to the frequency with which we moved (father transferred a lot), we did upon occasion. The houses were decent houses. The owner never once showed up, nor did he have a manager. They usually have an approved plumber and electrician to call if there is a problem. If you live in a house, whether you own it or not, problem resolution is usually slower than in an apartment. That’s the nature of the beast.

I agree that there won’t be a lot of people who’d want to buy these apartments, but there is a market in NYC for rent controlled, occupied apartments. And rent control is VERY tenant friendly here (people are hard to evict), which therefore makes a investment less attractive. Most places make it easier to evict tenants that have fallen behind on payment, which should make investing in these properties more promising. But I agree, the market will be thin. These will mainly sit with the banks.

However, turnover ex financing is higher than you might think. Roughly 20% of Americans move every year, so these might not be as long-term a liability as feared.

Banks are already in the business of sending bills and collecting checks, so that aspect is in line with current skills.

The leases could also be triple net, that would take the bank out of the maintenance role. After all, as homeowners, the borrowers were already responsible for maintenance, so there should be not objection to this.

And in some buildings in NYC, people spend A LOT on fixing up their rent-stabilized apartments, precisely because they have some property rights (you cannot be denied the renewal of the lease if you pay on time, and your right to sublet is better than in a coop). One woman spent over a million dollars, and I know personally of several others who’ve spent in the $50,000 to $200,0000 range. So it isn’t a given that renters will trash their places either, particularly if it is a place they like and they are glad to have it.

People hate lawyers until they need one, then there are no atheists in foxholes:

F E D E R A L I S M

Learn it. Live it. Know it.

Real property law is the ULTIMATE example of laws left to the several states. THEORETICALLY under the commerce-prohibiting technique Congress can pre-empt some of this, but I wouldn’t bet on how much (please google FDR and court-packing and realize there is nothing new under the sun and a lot of the New Deal was ruled unconstitutional on this ground).

Show of hands. Who here thinks that anytime soon legislation can be drafted that implicates 50 states’ recording statutes, lien statutes, landlord tenant law, on and on and on.

None of this nitwit ideas can be done in the context of securitization; PUHLEEZE understand the tax laws re REMICS are a mess of complexity but do NOT contemplate shared participation in negative equity certificates and operating rental real estate.

Ugh.

Either everyone behind this is totally brain dead or this is all just stalling smoke and mirrors to appear to be taking action.

HERES A CLUE:

The reason the banks WILL cave on Chapter 13 cramdowns is simple…

Chapter 13 cramdowns ultimately are operating independent of the consent of the mortgage lender to the extent of the overcollateralization.

If a securitized loan goes into Chapter 13, then at the end of the day what happens is not up to the securitization trustee holding the loan, but up to the judge.

Otherwise, in a voluntary workout, the more the securitization trustee gets creative, the more likely he/she is exposed to liability for breach of fiduciary duty (just imagine what happens if a trust takes a short refi plus a certificate, thus screwing over the income beneficiaries or, worse, exposing them to an unfunded tax liability).

Also, goodbye Q election (that’s the thing that keeps them off balance sheets so long as there’s no active management other than “brain dead” administration.

Not a bad day’s work. Loss of REMIC pass-through tax status, loss of Q election, liability for breach of fiduciary duty, certificates that may not be legally liens in many states, unrecordable in some, thus eliminating any possibility of title insurance…

Sigh.

Who would be the landlord? At first it would be the banks, but since they don’t want to be in the business, they would likely sell off to professional landlords. Who would want to be that professional landlord? Well I think that depends on the price.

* one way apartments/condos function is to have similar appliances purchased in bulk at discount rates. Who would even attempt to bother maintaining widely disparate properties with unknown levels of decay?

* My complex picks up individual trash bags daily from outside every dwelling so as to eliminate dumpster diver seediness. What non-owner is going to bother with staying current with the (decently expensive) trash stickers?

* Electric and utilities. If you don’t own your place and anything gets turned off, whose fault is it? Yes, there’s a legal system to answer these questions, but in the meantime whatever delta of value was added for the non-resident owner was destroyed.

To sum, we have a plan sounding good for the *current tenant* – but who’s picking up the tab?