September 30, 2013
Borden & Reiss on REMIC Failure, in a Big Way
Brad and I posted REMIC Tax Enforcement as Financial-Market Regulator to SSRN (as well as to BePress). The article is forthcoming in the University of Pennsylvania Journal of Law and Business and it provides our extended analysis of how the organizers of purported Real Estate Mortgage Investment Conduits (REMICs) failed to abide by the requirements necessary to obtain the favorable REMIC tax status. We had addressed this topic in shorter articles here, here, and here, but this is our most comprehensive take on the subject. We look forward to hearing reactions to it.
The abstract reads:
Lawmakers, prosecutors, homeowners, policymakers, investors, news media, scholars and other commentators have examined, litigated, and reported on numerous aspects of the 2008 Financial Crisis and the role that residential mortgage-backed securities (RMBS) played in that crisis. Big banks create RMBS by pooling mortgage notes into trusts and selling interests in those trusts as RMBS. Absent from prior work related to RMBS securitization is the tax treatment of RMBS mortgage-note pools and the critical role tax enforcement should play in ensuring the integrity of mortgage-note securitization.
This Article is the first to examine federal tax aspects of RMBS mortgage-note pools formed in the years leading up to the Financial Crisis. Tax law provides favorable tax treatment to real estate mortgage investment conduits (REMICs), a type of RMBS pool. To qualify for the favorable REMIC tax treatment, an RMBS pool must meet several requirements relating to the ownership and quality of mortgage notes. The practices of loan originators and RMBS organizers in the years leading up to the Financial Crisis jeopardize the tax classification of a significant portion of the RMBS pools. Nonetheless, the IRS appears to believe that there is no legal or policy basis for challenging REMIC classification of even the worst RMBS pools. This Article takes issue with the IRS’s inaction and presents both the legal and policy grounds for enforcing tax law by challenging the REMIC classification of at least the worst types of RMBS pools. The Article urges the IRS to take action, recognizing that its failure to police these arrangements prior to the Financial Crisis is partly to blame for the economic meltdown in 2008. The IRS’s continued failure to police RMBS arrangements provides latitude to industry participants, which facilitates future economic catastrophes. Even without the IRS taking action, private parties can rely upon the blueprint set forth in the Article to bring qui tam or whistleblower claims to accomplish the purposes of the REMIC rules and obtain the beneficial results that would occur if the IRS enforced the REMIC rules.
September 30, 2013 | Permalink | No Comments
September 27, 2013
CFPB Tool Puts HMDA Data on Web
The Consumer Financial Protection Bureau has posted an online tool to make Home Mortgage Disclosure Act (HMDA) data available to consumers in an easy to use format. The Bureau notes that in 2012
there were approximately 18.7million HMDA records from 7,400 financial institutions. This information includes the majority of the country’s mortgage applications and mortgages made – known as loan “originations” – by banks, savings associations, credit unions, and mortgage companies. The public information is important because it helps show whether lenders are serving the housing needs of their communities; it gives public officials information that helps them make decisions and policies; and it sheds light on lending patterns that could be discriminatory.
The Bureau says that the tool
focuses on the number of mortgage applications and originations, in addition to loan purposes and loan types for 2010 through 2012. It looks specifically at first-lien, owner-occupied, one- to four- family and manufactured homes. Using the tool, the public can see nationwide summaries or they can choose interactive features that allow them to isolate the information for metropolitan areas. The public can easily explore millions of data points with these user-friendly graphs and charts.
I found one of the highlights derived from the tool particularly interesting: “Of the nearly 13 million applications in 2012 for home purchase loans, home improvement loans, and refinancing, more than 8 million resulted in loan originations.” (2) It will be interesting to see what Google Mashups might come from all this data.
September 27, 2013 | Permalink | No Comments
United States District Court Dismisses Plaintiff’s Contentions Against MERS, Alleging Wrongful Foreclosure and Unfair Business Practices
The United States District Court for the Northern District of California in deciding Pantoja v. Countrywide Home Loans, et al. 5:09cv016015 (N.D. Cal., 2009) affirmed MERS’ authority to foreclose. MERS’ ability to foreclose was again affirmed in this case, contrary to plaintiff contentions alleging wrongful foreclosure, unfair business practices, failure to disclose information regarding the plaintiff’s loan, claims arising under TARP, and various violations of state law related to the Notice of Default and the trustee sale.
The Court granted MERS’ motion to dismiss on several grounds. One ground was that the court concluded that the plaintiff lacked standing to bring the suit because he failed to tender the amounts due and owing under the note. The court also held that the plaintiff did not have a private right of action under TARP, and that his claims for unfair business practices were not supported by any facts.
The court also denied the claims for wrongful foreclosure. Accordingly, the court found that under state law, there was no requirement for the production of an original promissory note prior to the initiation of a non-judicial foreclosure. So, the absence of an original promissory note in a non-judicial foreclosure does not render a foreclosure invalid.
September 27, 2013 | Permalink | No Comments
California Court Rules That State Law Did Not Require Possession of the Promissory Note in Order to Initiate a Non-Judicial Foreclosure
The Eastern District of California in deciding Chilton v. Federal National Mortgage Association, No. 1:09; 2187 (E.D. Cal., 2010) dismissed the plaintiff’s complaint claiming wrongful foreclosure and lack of standing. The court held that California law did not require possession of the promissory note in order to initiate a non-judicial foreclosure.
Although MERS was not explicitly named as a defendant in the action, the plaintiff argued that MERS lacked standing to foreclose since the note and deed of trust had been separated. The court rejected this argument.
September 27, 2013 | Permalink | No Comments
California Court Held That State Law Did Not Require Possession of the Note as a Precondition for Initiating a Foreclosure Sale
The Los Angeles County Superior Court in deciding Linares, et al. v. JLM Corporation, et al., No. YC060372 (2009), after considering the plaintiff’s contentions, rejected them in favor of the defendant’s argument. In accepting the defense’s argument, the court held that California law did not require the possession of the original note as a precondition for initiating a foreclosure sale.
Additionally, the court found that under California law, an “allegation that the trustee did not have the original note or had not received it, is insufficient to render the foreclosure proceeding invalid.”
September 27, 2013 | Permalink | No Comments
September 26, 2013
California Court Finds that MERS Was Not Liable for Wrongful Foreclosure, Breach of Contract, and Breach of the Implied Covenants of Good Faith and Fair Dealing
The United States District Court for the Central District of California hearing Gaitan v. MERS, et al, 09-1009 (C.D. Cal. 2009) found that MERS had the right to initiate foreclosure proceedings. The court also found that MERS was not liable for claims including wrongful foreclosure, breach of contract, and breach of the implied covenants of good faith and fair dealing.
The plaintiff alleged that several flaws in the documents he received proved the mortgage loans were obtained by fraud. Specifically, he alleged that neither the adjustable rate mortgage loan documents nor the truth in lending disclosure statement “clearly and conspicuously disclosed”: (1) the actual interest rate on which the scheduled payments were based; “(2) that making the payments according to the payment schedule listed in the TILD will result in negative amortization and that the principal balance will increase; and (3) that the payment amounts listed on the TILD are insufficient to pay both principal and interest.”
The plaintiff alleged that not only were the disclosure statements “unclear and inconspicuous,” but they were “deceptive” and “based in order to mislead and deceive plaintiff into believing that he would be getting a loan with a low fixed payment rate that would be sufficient to pay both interest and principal.” The court examined each of the claims in the plaintiff’s argument in turn, and determined that the plaintiff failed to argue the viability of any of the claims.
September 26, 2013 | Permalink | No Comments
