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.