A REMIC (Real Estate Mortgage Investment Conduit) is a corporation, trust, partnership or a segregated pool of assets that qualifies for special tax treatment under the Internal Revenue Code of 1986 (as amended, the “IRC”).
The principal advantage of forming a REMIC’s for the sale of mortgage-backed securities is that REMIC’s are treated as pass-through vehicles for tax purposes helping avoid double-taxation. For instance, in most mortgage-backed securitizations, the owner of a pool of mortgage loans (the Sponsor or Master Servicer usually) sells and transfers such loans to a special purpose entity, usually a trust, that is designed specifically to qualify as a REMIC, and, simultaneously, the special purpose entity issues securities that are backed by cash flows generated from the transferred assets to investors in order to pay for the loans along with a certain return. If the special purpose entity or the assets transferred qualify as a REMIC, then any income of the REMIC is “passed through” and taxable to the holders of the REMIC Regular Interests and Residual Interests.
First of all, one should understand that just one Trust might usuallly have anywhere from 2000-5000 loans in the asset pool. This is millions of dollars in cash flow payments each MONTH from a Servicer (receiving payments from borrowers) to a REMIC (Trust) with the cash flow ”passing through” the Trust (REMIC) without taxation to the investors. The investors have to pay taxes on the cash flow payments from their interests just for the record. But imagine the taxes a Trust would have to pay on $30, 50 or 100 million dollars per year if this “pass through” taxation benefit didn’t exist? Worse, what would be if a Trust that was organized in February 2005 were found to have violated the REMIC guidelines outlined in the Internal Revenue Code? At $4 million per month in cash flow, we’re talking about around $190 Million in now, TAXABLE income. Hmmmm… let me think of a word… Armageddon comes to mind.
If a Trust – or a Servicer or Trustee acting on behalf of the Trust - were found to have violated these very strict REMIC guidelines to qualify as a REMIC, the taxable status of the REMIC can be revoked; the equivalent of financial Armageddon for the Trust and its investors.
Folks, I’m clueing in you in to some major, major insights in the ‘War on the Home Front’ and some very, very potent weapons that can be used to fight this war.
In order for the Trust to qualify as a REMIC, all steps in the “contribution” and transfer process (of the notes) must be true and complete sales between the parties and within the three month time limit from the Startup Day. Therefore, every transfer of the Note(s) must be a true purchase and sale, and, consequently the Note must be endorsed from one entity to another. Any mortgage note/asset identified for inclusion in a Trust seeking a REMIC status MUST be deposited into the Trust within the three month time period calculated from the official Startup Day of the REMIC as per Section 860 of the Internal Revenue Code.
But what if the Notes weren’t actually true sales? What if the Notes weren’t in fact transferred and sold to the Depositor from the Servicer? Or from the Depositor to the Trust? What if the Notes weren’t actually sold and deposited into the Trust within the three month time limit? Oh boy… big problem.
So what’s the deal with all these Notes mysteriously being lost in all these foreclosure cases? Hmmm. Gotta be something to that. Why is it that nearly 100% of every Note I’ve ever seen in a foreclosure case lacks the proper endorsements evidencing the chain of ownership AS DISCLOSED TO THE SEC AND IRS?
I’ll leave it at that for now… things to think about. If you need help or have questions about this, I have a lot more to this story. Just give me a shout. Until then, fight the good fight. Don’t let anyone take your home unless they prove through PROPER documentation that it’s theirs to foreclose and take.
