Mirable Dictu! Has Someone Noticed the IRS isn’t Enforcing Tax Laws in the Mortgage-Industrial Complex?

Reader Deontos highlighted a post on Reuters by two Brooklyn Law School professors, Bradley Borden and David Reiss, on a subject near and dear to our hearts, the abject failure of the IRS to take interest in widespread, probably pervasive, violations of REMIC, the part of the Federal tax code that governs mortgage securitizations.

The reason this matters is that this situation belies on of the Administration’s pet claims, that its hands were tied as far as addressing the foreclosure mess was concerned because it had no leverage over servicers. As we’ll discuss, in fact the Administration has a nuclear weapon in its hands that it is simply refusing to use.

The reason the Borden and Reiss piece is noteworthy is it’s the first time I’m aware of that experts have chosen to comment at length on the REMIC issue, suggest that there is likely a BIG problem here, and politely point out that the REMICs may have committed fraud, which would allow the statute of limitations to remain open indefinitely, giving the IRS plenty of time to investigate and litigate.

However, I suspect the professors have heard that the IRS is choosing to do nothing, as their quote of Lee Sheppard at the top of their piece suggests:

They take aggressive positions, and they figure that if enough of them take an aggressive position, and there’s billions of dollars at stake, then the IRS is kind of estopped from arguing with them because so much would blow up. And that is called the Wall Street Rule. That is literally the nickname for it.

We suspect they know full well the Wall Street Rule is being applied here.

For those of you who are new to this issue, the 1986 Tax Reform Act created Real Estate Mortgage Conduits, aka REMICs, to allow mortgage securitizations to be pass-through entities, which means their income would not be subject to double taxation. But to get pass through treatment, the REMIC needed to adhere to strict requirements. One of them was it would acquire all its assets within 90 days of its start-up date. If you are at all familiar with chain of title issues in securitizations, you know that appears not to have occurred in 2004 and later securitizations close to universally, and probably happened in a significant number of securitizations between 2002 and 2004. Basically, the securitization industry appears to have decided it couldn’t be bothered to staff up back offices to meet rising origination volumes. And one of the corners they cut was adhering to the carefully designed steps to get the mortgage notes from the originator into the business trust that was supposed to comply with REMIC. That meant everything needed to be done, meaning multiple endorsements on each and every one of a typically 4,000 to 5,000 mortgage notes, by startup date + 90 days. But as the robosigining scandal and the continuing mess in local courts has revealed, in the overwhelming majority of cases, these endorsements (which were to effect transfers through several legal entities to the trust) not only often weren’t done by the cutoff date, and attempt to pretty up the record for the purpose of foreclosure (which is not kosher but is nevertheless common) were often botched.

As far as we can tell, this issue was first raised with the IRS in the summer of 2010, with a senior individual in enforcement who was up on REMIC by virtue of having revised the rules to allow for HAMP mods. She was initially very excited about it. When the attorney who had contacted her had not heard back as promised, he called her and she took the call and said she had been told not to speak to him. She said the question had gone to senior levels in the Treasury and had been referred over to the White House, which said that it did not want to use tax as a tool of policy. Another attorney told me later of securing a meeting at the IRS on the same issue. The staffer (apparently not as senior as the one in the first story) said that the parties intended to do things correctly and that was good enough. The attorney asked if he could call the IRS staffer and have him tell the IRS examiner that intending to do things was good enough the next time the attorney was audited. I’ve since been told by other lawyers that they have also brought up the issue of REMIC violations with the IRS and have been told that the IRS has no intention of pursuing it.

So the IRS refusal to touch this issue seems to be common knowledge in legal circles. I can’t imagine Borden and Reiss aren’t appraised, which means their post (which summarizes a short paper) is meant to make trouble for the miscreant IRS.

But there is a wee problem with the premise of their article:

The issue of REMIC failure for tax purposes is important in at least three contexts:

(1) in any potential effort by the IRS to clean up this industry;

(2) in civil lawsuits brought by REMIC investors against promoters, underwriters, and other parties who pooled mortgages and sold mortgage-backed securities; and

(3) state and federal prosecutors and regulators who consider bringing criminal or civil claims against promoters, underwriters, and other parties who pooled mortgages and sold MBSs.

As for (1), the IRS has no interest in doing anything.

As for (2), I’ve spoken to some of the few litigation-minded investors, and they don’t want to touch this issue (if the IRS were to find the securitizations to have violated REMIC rules, the draconian taxes would fall on investors. so they would sue the various parties that failed to do their duties). To argue that they face tax liability, they’d have to argue that mortgage notes did not get to the trusts. That would mean they were taking the position that the MBS were partly or entirely not mortgage backed. That would lead to serious doubts about their value, lowering their prices. While investors might in the end recover more from the originators and structures than they lost via the intervening fall in prices, litigation is costly, uncertain, and takes time, and in the meantime, they’d be sitting on large, self inflicted losses.

As for (3), even though the mortgage settlement did not release IRS claims, the intent was to make securitization issues a thing of the past. Put it another way: if the near moribund Mortgage Task Force is unable to see any avenues for criminal prosecutions, it will make certain to steer clear of this issue.

Despite this overview, I suggest you read the post. It’s well written and clear, which is a rare accomplishment in articles on tax matters. And in closing, the authors finger the law firms which almost certainly knew the originators and sponsors were ignoring the provisions of their contracts, yet issued opinions (of an “if-then” form: “if you did this, then it’s a REMIC,” which got them off the hook too). This is one of the ugly parts of the mortgage debacle which has not gotten the attention it deserves, the way in which lawyers, rather than acting in their traditional role of drawing bright lines and advising their clients to stay within them, became part of the problem. As Borden and Reiss tell us:

Law firms issued opinions that MBS transactions would qualify as REMICs. They did so even though they knew or should have known that an insufficient percent of trust assets would satisfy the definition of qualified mortgage under the REMIC rules. Nonetheless, the IRS does not appear to be engaged in auditing REMICs. Its reasons for not challenging REMIC status at this time may be justified as they study the issue and observe the outcome of the numerous actions against REMICs and originators.

Because REMICs did not file the correct returns and may have committed fraud, the statute of limitations for earlier years will remain open indefinitely, giving the IRS adequate time to pursue REMIC litigation after it obtains the information it needs. If the IRS does not take action at the appropriate time, however, it will be a serious failure and will result in the loss of billions of dollars of tax revenue for the federal government.

More troubling still is the IRS’s failure to address the wide-scale abuse and problems that existed during the years leading up to the financial meltdown. The IRS’s failure to adequately police REMICs is one more reason that the mortgage industry was able to overly inflate the housing market. And that, inexorably, led to the crash and our tepid recovery from it.

More generally, by overlooking the serious defects in the transactions, courts and governmental agencies encourage the type of behavior that led to the financial crisis. Lawmakers, law enforcement agencies and the judiciary cede their governing functions to private industry if they allow players to disregard the law and stride to create law through their own practices.

If we allow the Wall Street Rule to apply, then Wall Street rules. If the rule of law is respected, then Main Street can look forward to the equal protection of the law and returned prosperity without fear of bubbles inflating because powerful special interests can flout the law that applies to the rest of us.

The last paragraph no doubt sounds quixotic to readers of this blog. But if we give up on demanding better of professionals and officials, we are guaranteed never to get it.

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  1. Conscience of a Conservative

    The United States has a long and proud history of either not enforcing tax laws or changing them when it suits policy. We did this with AIG, we did this with GM, we did this for the home builders after the mortgage crisis(so they could build more homes no doubt) and we’re doing it again on REMICs.

    The IRS is as you suggest fully aware of the issue and has chosen for a variety of reasons to look the other way. And considering the outstanding mortgage issues out there, perhaps this is one fight not worth fighting.

    By the way, Washington State had an interesting MERS ruling last week. We should be focusing on that front first.

    1. Nathanael

      If the federal judges were on top of things they could issue a writ of mandamus and *force* the IRS to prosecute.

    2. hermanas

      Would “the IRS’s failure to address the wide-scale abuse and problems…” be a structural employment problem (lack of skills), a political problem at an apolitical agency or “a feature not a bug” thing?

  2. Middle Seaman

    Lack of law enforcement isn’t restricted to the IRS. Financial crimes are prosecuted only when the crime affects all Streeters. Example, insider trading. Crimes against others and the state are fine.

  3. Fraud Guy- Also

    One of the things that is disappointing about this issue, from a private right of enforceability standpoint, is that the New York State False Claims Act, doesn’t appear to apply. While that law generally gives citizens the right to sue on behalf of NYS for underpaid state taxes (and thereby give the IRS a kick in the pants regarding issues it doesn’t want to touch at the federal level), the state law there regarding REMICS appears to exempt them from this type of enforcement.

  4. Warren Celli

    ‘Too big to fail’ now morphs into the kinder softer sounding “The Wall Street Rule” further deflecting from and removing it from its real meaning — Forced Complicity Crimeunism!

    You should add a fourth “wee problem” to the list of ‘wee problems’. Knowledge of the poisoning of real estate title law is getting out to the street and is added to the many negatives that go into the decision of prospective purchasers to NOT buy the Scamerican dream (read nightmare here). The trust is gone.

    Intentionally created perpetual conflict is on a roll.

    Deception is the strongest political force on the planet.

    1. Nathanael

      Title poisoning is the biggest issue, the one which is already starting to blow up in slow motion.

      There is only one way to resolve in the end: local courts are going to have to start applying the adverse possession rules.

      1. Warren Celli

        Nathanael said; “There is only one way to resolve in the end: local courts are going to have to start applying the adverse possession rules.”

        Eminent domain will be the most popular ‘local’ solution as it best puts the prudent against the not so prudent on so many levels. Remember this is not about profit it is about creating intentional perpetual conflict in the masses.


        “U.S. regulators and lawmakers are seeking ways to keep local governments from using the power of eminent domain to seize mortgages and cut borrowers’ debt, citing concern about the potential cost to taxpayers.

        The issue, which will be the subject of a Mortgage Bankers Association symposium today, has gained attention in Washington after the city of Chicago and California’s San Bernardino County said they would consider confiscating home loans. No community has taken the step so far.
        Enlarge image Cities Weighing Mortgage Seizures Draw Attention in Washington

        Legislation introduced last week by Representative John Campbell , a California Republican, would bar Fannie Mae, Freddie Mac, the Veterans Administration and the FHA from guaranteeing or buying loans in communities that seize mortgages. Photographer: Andrew Harrer/Bloomberg

        The federal government is positioned to wield broad power in the debate because it owns or guarantees 90 percent of U.S. mortgages through government-sponsored enterprises and the Federal Housing Administration. Legislation introduced last week by Representative John Campbell, a California Republican who will attend the symposium, would bar Fannie Mae, Freddie Mac (FMCC), the Veterans Administration and the FHA from guaranteeing or buying loans in communities that seize mortgages.”

        More here…


        Deception is the strongest political force on the planet.

  5. Clive

    Loved this bit for sheer two-faced’ness:

    “… had been referred over to the White House, which said that it did not want to use tax as a tool of policy…”

    I guess it depends on what exactly the policy is which is being enacted !

    Laissez-faire is obviously fine for not pursuing frauds and criminality, but it’s okay to proactively implement a tax code which gives huge get-outs to LBOs, Private Equity and allow them to treat debt interest as a deductible.

  6. Susan the other

    Surprising that they are digging this up just now. It has been very instructive to watch how successfully the administration has been able to keep this stuff quiet. For the last 2 years, there are certain things no one is allowed to even talk about and this has been one of them. I can just hear the conversation between the TBTFs’ Agent Timmy and Obama about how they had the best of intentions but things were moving so fast, well you know. And to use the IRS will only hurt the investors. Yesterday’s link to Randy Wray was interesting. He said now that the Fed is buying up 40Bn MBS a month from the banksters those “securities” will never see the light of day again unless there is an act of congress or a two year battle for FOI. This whole mess has been one gigantic obstruction of justice. Who really believes that the banks “had intended to do it correctly.” If that is true why did they knowingly pledge mortgages multiple times? It’s all such unmitigated bullshit.

  7. Watt4Bob

    Didn’t I hear that RMBSs that were supposed to be in REMICS were being used in the repo markets?

    It seems to me that there was also speculation that the same mortgages were being securitized and sold to multiple funds?

  8. enzica

    Can homeowners sue based on fraud as a way to get principal reduction, or more? Likelihood of success would be what? Thx

    1. Warren Celli

      Be careful what you wish for.

      Sure you can sue, but you also risk getting your credit score zapped with; “Account in dispute – reported by subscriber.”


      And think it through — if you prove that your title is faulty, and chances are pretty good that it might be — then that WOULD get the IRS interested, as any of your mortgage interest deductions would then be knowingly fraudulent and they could come after you. Mortgage interest deductions are over 200 billion per year. That’s great IRS potential and incentive here! They love to get the little guys.


      Isn’t Forced Complicity Crimeunism just grand?

      Aren’t you glad you own a Scamerican dream extortion magnet?

      Deception is the strongest political force on the planet.

        1. C

          No, not to my knowledge. He chose the Alfred P. Murrah Federal building which, like many such buildings around the country, houses a number of departments. I’m not sure if the IRS is there. But my recollection of the trial and his statements was that he was mad at “The Guvmint” as a whole and didn’t have a particular beef with the IRS.

      1. Nathanael

        See, that’s the trick. They’re doing this to people who are net in debt. People who are in positive balance sheet positions don’t give a damn about their credit scores…. but also don’t have mortgages.

  9. Paul Tioxon

    ” If we allow the Wall Street Rule to apply, then Wall Street rules. If the rule of law is respected, then Main Street can look forward to the equal protection of the law and returned prosperity without fear of bubbles inflating because powerful special interests can flout the law that applies to the rest of us.’

    ‘The last paragraph no doubt sounds quixotic to readers of this blog. But if we give up on demanding better of professionals and officials, we are guaranteed never to get it.” Says Yves, commenting on the final demand for a return to lawful operation of the economy, even if you are from Wall St.

    Yves, this is the political principle of capitulation, by abandonment of the participation required to have any consent whatsoever over the people and institutions in our lives, even the face of apparent hopelessness. And, it seems you do not want to capitualate, by abandoning the system, that you still believe that you can petition the government, and demand better from professionals and the industry they earn their living from. I am glad to see it written here in black and white.


    Bayard Rustin arrived at the Ashland Federal Correctional Institute in
    Kentucky on March 9, 1944, just eight days before his thirty-second
    birthday, and he quickly arranged a meeting with Warden R. P. Hagerman
    to discuss racial injustice at the prison. After their talk, Rustin
    decided to take a pen in hand and school the warden a bit more in the
    options one might choose when confronting discrimination. It was a
    remarkably bold move for a young black man in a Southern prison.
    “There are four ways in which one can deal with an injustice,”
    Rustin wrote. “a. One can accept it without protest. b. One can seek to
    avoid it. c. One can resist the injustice nonviolently. d. One can resist
    by violence.”
    By the time he finished reading the letter, Hagerman must have
    known, unmistakably, that this new prisoner from New York City did
    not have the slightest interest in accepting or avoiding any of the racial
    injustices that Hagerman and other Ashland authorities had institutionalized
    through the years. He would have been absolutely right: Bayard
    Rustin was a resister.


    Not only must we resist by any means necessary, but by all means available, tactically sequenced to pragmatic effect, by ALL MEANS TO EXHAUSTION. It is by trial and error, but by all means, not to give up until you have exhausted all means. We have to participate in democracy by more than just voting, but the platform of voting, of protesting, of demanding by exposing the problem clearly, are all a part of the solution. Democracy is not transmitted genetically from generation to generation with the ease of wealth by the legal institutions which pass power via oligarchic families, from father to son. We have to learn all over again how to resist the wealth that is dynastically amassed by the bourgeosie, who have set the world up in their image, not in the image of a democratically controlled republic, but of an endlessly power seeking, endlessly capital accumulationg transnational network of power.

    1. banger

      Resist? With what exactly? The game is over the oligarchs have won with the overwhelming approval of the people. We no longer live in Constitutional Republic and we no longer have the protection of law, unless we are part of the hereditary aristocracy. That’s reality. If we want to fight we fight by creating disciplined organizations that play politics the way it’s meant to be played–using any means necessary to reward friends and punish enemies. None of this marching around Manhattan getting chased by thugs.

      1. Paul Tioxon

        If you have nothing to start with, then you start with nothing. Rustin, as this episode of his life indicates, was jailed. Are you in jail for being who you are, thinking what you think? Is Yves? Or Lambert. Or the other people who openly identify themselves on this site? This was 1944, in 1963, Bayard Rustin was the general of the Civil Rights march on Washington DC. By studying this general of the Civil Rights Movement, in the tactics of social change, you may just not be as persistantly depressing as most of the clearly traumatized commentators of this site are. I wish you well, but there is no right or wrong side of history, it is not a mechanism grinding in only one direction. It is what we make of it.

      2. Nathanael

        “Freedom’s just another word for nothing left to lose.”

        At the point at which you have nothing to lose, you can demand a great deal.

  10. Hugh

    Thanks, I have been wondering about REMICs and if anything was being done. For me, this is a “the rule of law is dead” issue. If it was thee or me, we would be in a world of hurt, but because it is about powerful institutions and the rich and powerful who run them, the law does not apply.

    The way the REMICs were handled isn’t just fraud but looting. Our government and its elites run interference for these criminal activities because A) they are paid to and B) this is yet another means to allow banks to loot their way back to solvency.

  11. indio007

    These two are full of crap.
    Sloppiness? Not likely, more like re-re-rehypothecation and pledging the same asset again and again and again…..

    None of there were a true sale. The gov’t knows , the ratings agencies know, everyone knows.

    They banks simply threaten mutually assured destruction and people continue to take it up the ***.

    1. Yves Smith Post author

      No, I’ve got contacts with a lot of lawyers. The “mortgage was sold into multiple trusts” issue is super overhyped. It happened only with one originator, as far as they can tell. That does not mean that it is not a real risk to some borrowers, but this was not a common abuse.

    2. JohnR

      in my own case and through discovery, I found that not ONE of the documents meant to transfer either my own mortgage OR the bundled mortgages into the Trusts had even 1 signature on them. Not ONE! ERGO… they were never transferred from any one entity to another including the Trust. And mine was an Option One. Judge didn’t care. They presented an Assignment! Created PAST the date of filing foreclosure and not backdated (under PSA terms an obvious forgery). Judge didn’t care. They offered a fraudulently created application of Mortgage (ie. somehow I’d lost my 3 children and the child support I was required to pay with them, somehow I’d lost my US Citizenship! (news to me)), and more! Judge didn’t care. I showed violations of TILA, HOEPA, RESPA, FDCPA, Ohio Rico, and many more…. Judge didn’t care and through it all, I constantly interviewed Attorneys… they were relatively clueless and told the Judges so and asked for Legal Counsel, Judge didn’t care. That’s the state of Justice these days, Judges just don’t care.

  12. banger

    Yet more proof that we don’t live in anything remotely like the USA–for all it’s faults there was some minimal respect for the law. Today the law is what the aristocrats say it is and nothing more. No habeas corpus, no Constitution, only a system of security forces who are watching us and can snatch us from our homes any time they want and do anything to us they choose to do. For the most part, this is not necessary since the vast majoring of the population only begs to be given the blue pill–and so it goes. The only question is which will it be–full blow fascism or neo-feudalism. Fortunately for us the rightists are too stupid to carry it off–so we’ll have lords and ladies to serve folks.

    1. Gordon Cook

      Yves or anyone else. Does anyone know what happened to the databases of Country Wide, WAMU, and other subprime originators that went belly up? What kind of risks might there be if copies of these were in the hands of ex employees?

      1. C

        There was the longstanding promise by Wikileaks to release data from BofA. It was unclear what that dump contained but to judge from BofA’s reaction (hiring intel firms to take down Wikileaks) it was something radioactive. Perhaps their database was in the set.

        Unfortunately the files won’t be showing up anytime soon. Depending upon whom you believe either Assange deleted the files himself through sloppiness (the story from ex members) or the ex-members deleted the files themselves in an act of revenge or petty whining (the story from Assange).

        1. Gordon Cook

          Ah yes, I remember it well. Really disappointed it never came out. But I think we are thinking about a different kind of database. At the shops that originated the ninja and other types of fraudulent sub-prime mortgages like WaMu for example, what happened to the database of THOSE mortgages? The details on whom was sold what? The information that was supposedly shipped to the banks for securitization? Could it possibly be a temptation for a mortgage broker who had taken people for a ride to have copies of his employes data in electronic for such that she could go out some years later and approach the same people under a set of circumstance adjusted for the reality of autumn 2012?

          Now if Bank of America acquired WaMu in theory those electronic data bases and possibly any paper should have been transferred such that BOA would be the only folk n possession. Has anyone any where who is reading this blog ever run into ex brokers from these “shops” who may have walked out with a copy of their customers data? Does doing such open opportunities for these ex salespeople to commit new nasty acts?

          Right now these are hypothetical questions on my part. Has it occurred to any readers here to ask the same kinds of questions? Could holders of toxic mortgages be getting scammed from a new direction – if these basic mortgage hack shop databases were never secured?

        2. JohnR

          In my own foreclosure I retained, through Discovery, a complete (allegedly) list of all the mortgages contained within the Trust. I’ve since often wondered whether an online location should be created so that all those who have done as I could upload their collection and create a “public” database. I am lead to believe there is a location out there on the net that can look up the whereabouts of any loan within all the Trusts. Merging the 2 databases then might yield some very surprising results.

  13. Veri

    This problem was mentioned 2-3 years ago. I wish I had the article where the issue with REMICs and the possible violations were mentioned.

    A repeat article of what is already known. Seems, that is what most financial news is today. Numbs the mind. The New Normal.

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