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State Officials Starting to Question Securitization Fail, Whether States Should Tax RMBS

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This letter (hat tip Daniel Pennell) by Virginia delegate Bob Marshall is another indicator that mortgage backed securitization issues are not going away any time soon. Notice that the questions are sophisticated and show familiarity with recent litigation.

And look at question 10. I’ve been wondering when cash strapped states might look to the apparent failure of mortgage securitizations to adhere to REMIC rules as a possible trigger for tax assessments. The IRS simply refuses to go there. I was given a pretty close to temporaneous report last year when a lawyer who understood the tax issues contacted the IRS; the enforcement officer who took his call, who was very senior, understood the implications immediately and was very keen. But she reported back later that the question had gone to the White House and the response was “We are not going to use tax as a tool of policy.” So enforcing statutes is somehow abusive? This is either a deeply internalized Wall Street centric view of the world, or just plain corruption, take your pick. The IRS can always defend its stance because tax notions of what constitutes a valid transfer don’t have to map onto the legal treatment.

I don’t actually expect any state to have the guts to charge the investors in RMBS taxes because the trusts didn’t comply with the rules set forth for them to get pass through treatment. It would be a blow up the mortgage industrial complex level event (as in I’m sure any state official who tried going this route would get the political equivalent of death threats). But this issue represents considerable leverage, and there might be creative ways to use it. For instance, several states get together and use the tax threat to get major investors to pressure servicers for real principal mods, which is something the overwhelming majority of investors would favor but have heretofore been too chicken to beat up on Wall Street about it.

Brown Mortgage Backed Securities VRS

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19 comments

  1. stibbert

    nice post, Yves.

    as i’ve tracked thru this whole mess, the one constant feature was that RMBSs were specifically structured to avoid IRS tax liability for the investors. Numerous posts at many sites have documented the general failure of RMBSs to comply w/ the required mortgage-document transfers, but this post is the first example i’ve seen where litigation addresses tax liability.

    recent activity by county deed-recorders to hold MERS responsible for real-estate transfers are fee-based, not tax based.

    it’s especially hard to read the quote “We are not going to use tax as a tool of policy.” Taxation is a primary expression of government policy, & willful ignorance of existing tax law by a government tax-collection agency is disheartening.

    1. Francois T

      willful ignorance of existing tax law by a government tax-collection agency is disheartening.

      Disheartening?

      What Yves reported is is much more than disheartening. It shows a dangerous willingness from the IRS to comply with the WH diktats. Legally, it is NOT the WH who get to decide who the hell get taxed or not. So, how come it did happen here? Furthermore, why would a senior IRS official consult/report to the politic (the White House, no less….WTF???) a matter of tax law? Why should the WH get to know anything about this before having the IRS rendering a decision?

      Moreover, don’t the assholes in this Administration understand social dynamics 001? Lawlessness doesn’t start at the bottom, contrary to the hallucinations of the Fuckwad-in-Chief they’ve got as the inhabitant of the 10 Downing Street, London UK. Lawlessness is a learned behavior thought by the example of those at the top.

      The systematic refusal of this administration, the well-connected and privileged in this country to refuse any accountability, to skirt any moral code of conduct, to escape consequences for actions that land “little people” in life-shattering punishment is the fuel that generate riots like we’ve seen recently.

      Try to avoid being taxed by mounting a RMBS-like scheme on your own: it is gonna hurt aplenty.

      Yet, if you’re a big fish of the mortgage-industrial complex, the White House itself will give you a free pass.

      And these idiots expect people (I was about to write, “their subjects”) to be OK with such unfairness ad vitam aeternam?

      Not quite!

  2. attempter

    she reported back later that the question had gone to the White House and the response was “We are not going to use tax as a tool of policy.”

    This has to be placed in the proper class war context. Obama won’t use taxes as policy or anything else against corporate rackets.

    In complete contrast, Obama’s ardent to use tax policy as a corporatist weapon against the people, as in the case of the viciously regressive Stamp mandate he himself and his loathesome flunkeys and supporters now call a “tax”.

    http://blogs.investors.com/capitalhill/index.php/home/35-politicsinvesting/1843-obamacares-mandate-is-not-a-tax-except-when-it-is

        1. ambrit

          Gentlemen;
          Just like the last time Tea Party Indians showed up, some Reactionary Elite Politico has established control of the government in Boston. Let’s hope this one suffers the same fate as his predecessor.

  3. CaitlinO

    Question number 8 is also interesting. It looks like another poke at the notorious formerly-50 state attorney general give-away, uhhhh, settlement.

  4. Alice

    Glad to see a post about the taxes. This was my red flag when I fist read about this mess. I could see the problems coming but have noticed a complete lack of discussion on this issue. Good to see that NC is covering this. There are just so many pieces to this puzzle it’s hard to know where to begin. Trying to explain all of this to the average John Doe makes my head spin and eyes cross.

    1. ambrit

      Mz Alice;
      It also gets lots of incredulous looks and semi-bantering disparagement from said ‘yokels.’ Once they get the drift however, they tend to get mad as H—! When framed properly, most reasonable people are willing to contenance some sort of punitive action against the ‘perps.’ Hearts and Minds my friends, Hearts and Minds.

  5. ron

    mortgage securitization process past and future seems to have fallen under national security! Clearly the banking system along with any hope for a return of private funding for the mortgage market is at stake and the government has crudely drawn lines in the sand.

  6. greggp

    “She reported back later that the question had gone to the White House and the response was “We are not going to use tax as a tool of policy.”

    Are they serious? Half of the the $700 billion “stimulus” was tax cuts. Washington is debating an extension of the payroll tax moratorium in order to “put more money in people’s pockets.”

    What am I missing? Could it be something along the lines of what just about every previous poster alluded to?

  7. Blurtman

    I think I will use this as a template to send to my Washington state Finance Secreatary as well as AG, who is running for the goverorship spot. I encourage everyone to do the same.

  8. scraping_by

    The entire securitization thingie was about banks turning themselves into pure middlemen for housing loans.

    The part that faced toward consumers/homeowners failed in every particular, origination, servicing, tracking, etc.

    The latest part of the story in their failures facing toward investors, packaging, evaluating, selling, etc.

    Over and above the alegal requirements, the basic issue of fair dealing and honesty is no small part of the story. Which is the part that gets the shortest shrift in management school. If a student brings ethics and morality with him, just like in law school, they’re liabilities.

    So. Banks thought they could pose as the good guys while their outsources and customers did the underhanded deeds. Well, so much for that.

  9. beowulf

    Yves, Bill Black should require his criminology students to read your blog every day and tally the number of serious felonies that are mentioned in passing. Whenever you think, “there ought to be a law against that”, invariably there already is.

    Here, I’ll get them started–
    the [IRS] enforcement officer who took his call, who was very senior, understood the implications immediately and was very keen. But she reported back later that the question had gone to the White House [aka “Executive Office of The President” and the response was “We are not going to use tax as a tool of policy.”

    § 7217. Prohibition on executive branch influence over taxpayer audits and other investigations
    (a) It shall be unlawful for any applicable person to request, directly or indirectly, any officer or employee of the Internal Revenue Service to conduct or terminate an audit or other investigation of any particular taxpayer with respect to the tax liability of such taxpayer.
    (b) Any officer or employee of the Internal Revenue Service receiving any request prohibited by subsection (a) shall report the receipt of such request to the Treasury Inspector General for Tax Administration.
    (c)Any person who willfully violates subsection (a) or fails to report under subsection (b) shall be punished upon conviction by… imprisonment of not more than 5 years
    (d)For purposes of this section, the term “applicable person” means… President, the Vice President, any employee of the executive office of the President
    http://www.law.cornell.edu/uscode/usc_sec_26_00007217—-000-.html

  10. beowulf

    And don’t forget…

    § 7214. Offenses by officers and employees of the United States
    Any officer or employee of the United States acting in connection with any revenue law of the United States…
    (6) who does or omits to do any act with intent to enable any other person to defraud the United States…
    http://www.law.cornell.edu/uscode/usc_sec_26_00007214—-000-.html
    and
    § 7212. Attempts to interfere with administration of internal revenue laws
    (a) Corrupt or forcible interference
    Whoever corruptly… endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly… obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title…
    http://www.law.cornell.edu/uscode/usc_sec_26_00007212—-000-.html

  11. Nathanael

    Beowulf, the problem is that the federal government has carefully eliminated justice through procedural blockades.

    In this case it’s the “DA problem”. Only the Department of Justice is allowed to file criminal cases in federal court, so if they decide to give criminals a free pass, there’s nothing one can do until the President leaves office, short of vigilante justice and revolution. They can’t even be prosecuted for their participation in the criminal conspiracy because of “absolute immunity”. After the President leaves office, of course, the statute of limitations may be up.

    Theoretically, in the US system, a federal grand jury could issue indictments on its own, but that’s the only out, and great efforts have been made to prevent that from happening by controlling grand juries — specifically by lying to them about their powers, rights, and duties. Judges actively encourage lying to grand juries about such things and have for over 100 years.

    In the UK system, anyone with a bankroll could simply run a private prosecution (and I’m surprised it hasn’t happened yet).

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