Thursday, December 06, 2007

Hope Now – For Favorable Tax Treatment

Money is when you put a dollar into the vending machine and you get back two nickels, a dime and a bag of peanuts. Finance is when you package a large group of loan contracts and make the income stream tax free. The rich who want to exploit us and the rich who want to manage us are not concerned about money, but they are united in their desire to remain rich. Today our political leaders give us Hope Now --- it’s a website.

Atlanta Journal: Help with mortgages: The fine print. The plan announced Thursday by President Bush applies to subprime residential adjustable-rate mortgage loans that have an initial fixed-rate period of 36 months or less and that: were originated between Jan. 1, 2005 and July 31, 2007; are included in securitized pools of mortgages; and have an initial interest rate reset between Jan. 1, 2008 and July 31, 2010.

The government says they are willing to let specific things happen on some loans within a narrow window of time. What things? Well the government is willing to let the loans try not to default. You may think the government is concerned about the welfare of misguided borrowers in over their heads in debt. You would be wrong. These actions are all about tax law for beneficiaries of the mortgage payments.

Tanta: First, REMICs … One of the qualifying requirements of REMIC status is that the underlying pool of loans is “fixed.” … If at any time the trust starts taking actions that can be interpreted as “actively managing” the underlying pool, the REMIC status is in jeopardy.

The takeaway point: … whether securitizations “allow” modifications is based not on a question of what verbiage is or is not in the PSA, but rather on an interpretation of what is or is not required for REMIC tax treatment or off-balance sheet accounting.

Is it all kind of anemic after all the build-up? Yep. Does it mean contracts are now invalidated in the U.S.? Not as far as I can see; in fact, I'd say the contracts were the part of this that got the most thorough protection. In my reading of this, giving a deal to a borrower almost seems incidental.

The government actions are in essence a clarification that loan servicers can take advantage of the verbiage within mortgage contracts to “mitigate” the potential for default, without those actions being interpreted as management of the securitized loan pools - for tax purposes. Underneath the façade about saving the family home, this is really all about tax law. Warms the heart don’t it.